The mutual fund industry should not be over confident about continued retail interest in equity if the stock market keeps falling, UBS analyst Gautam Chhaochharia said in a report.

Speaking to BusinessLine , Chhaochharia said: “Retail investors tend to chase historical returns… The one-year returns have now been negative for the last three months and the two-year returns may turn negative by mid-2016 if the markets don’t rally. So, the assumption that local retail inflows into Indian equities have become a structural trend, especially given abysmal returns on gold and property, plus the low exposure of local investors to Indian equities is flawed,” he explained.

When gold, equity and real estate fail to perform, retail investors still have the option of turning to term deposits offered by banks — which are arguably risk-free and give retail investors approximately 8 per cent annual returns. “Ten-year government bonds currently offer a 7.8 per cent risk-free return,” he added.

In December 2015, net inflows into equity mutual funds were $0.8 billion, and whilst that is a positive number, it is the lowest in 18 months, Chhaochharia said in the report. Systematic investment plans (SIPs) are stickier, he said, but if markets fall further or stay stagnant, investors might choose to leave.

The report was based on investor behaviour in mutual funds over the last 15 years, through market falls and rallies. Nifty 500 has fallen 7 per cent year-to-date after remaining flat in 2015.

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