Roughly one out of every two rupees in mutual fund's equity schemes was invested after December 2012. The average holding period for only around 50 cent of them is greater than the 2 year mark, shows data provided by industry body the Association of Mutual Funds in India (AMFI). Interestingly, a quarter of them have an average holding period of six months or less.
A large proportion of this is said to be on account of investors exiting their holding as the markets have risen, as well as possible commission-led churning.
Harsha Viji, managing director, Sundaram Mutual said that investors typically invest in equities with only a two year view. He said that the equity investor's median holding period is between 18-24 months.
A median is the middle value of a set of numbers; and is considered more accurate than an average which can be skewed by large numbers at either end.
"This is one of the reasons that we started launching closed-ended schemes. We found that regardless of how the fund manager is doing, it's a lottery if the investor is going to be exiting so soon," he said.
Viji blamed the volatility which equity markets have seen since 2008, and noted that returns had been limited until last year which resulted in investors exiting.
Dhirendra Kumar said that it could also be the result of pressure from distributors who look to profit from getting investors to exit old schemes and invest in new ones as the bull market picked up. Investments from before regulatory changes had limited trail commission unlike today.
This has created an incentive for distributors to switch their clients from existing schemes in favour of schemes which offer both an upfront commission as well as a higher trail commission, according to Kumar.
"The churn is beneficial to distributors. Very old investments hardly had trail," he said. For non-equity schemes, 40-50% have a holding period of six months or less. However, these schemes include short-term debt funds which institutional investors use to temporarily park capital.
An analysis of previous years' data shows that the average age of equity holdings has been on the decline.
In fact, the proportion of people who hold for more than two years has shown a declining trend since September 2013. This means that the proportion of investors holding on for at least two years has been going down even as the market has been going up. Investors holding for more than two years hit a record high of 63.43% in September 2013. This was the highest figure in data which goes back to March 2009.
Market experts typically ask equity investors to invest with a 3-5 year time horizon. The idea is that while equity investing has typically provided higher returns than other traditional investment avenues like fixed deposits, these returns are lumpy.
This means that a long-period of low or negative returns may be followed by a period of high returns. This is different from other investments like fixed deposits, where returns are regular across periods. Experts say that this makes it important for individuals to remain invested in equities for a longer period of time, so that they are around for the full-cycle.
Harshendu Bindal, president, Franklin Templeton Investments India suggested that the exit of older investors could have contributed to the decreasing average.
"A lot of people came in at the end (of the previous cycle) and saw an opportunity to exit," he said. He said that the average holding period is likely to head north in the days ahead as the effect of these exits on the overall numbers fade.
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