[Fund Market Crisis] Fund Market Facing Crisis as Donghak Ants Turn Away

Stock Market V-Shaped Rebound Sparks Direct Investment Boom
Public Fund Balances Down 5 Trillion Won in 7 Months
Trust Decline Due to Private Fund Scandal Also a Factor

[Asia Economy Reporter Eunmo Koo] As individual investors massively engage in 'direct investment,' emerging as a new driving force in the stock market, the phenomenon of neglecting 'indirect investment' products such as funds is intensifying. With direct investment overheating, including a surge in 'debt investment' where investors borrow to invest in stocks, there are calls for a stable investment strategy through funds to be pursued in parallel.

According to the Korea Financial Investment Association on the 21st, the outstanding balance of public offering funds (equity-type, mixed-type, bond-type) held by individual investors decreased by more than 5 trillion KRW over seven months, from 45.3702 trillion KRW at the end of last year to 39.9616 trillion KRW at the end of July. The number of accounts also dropped by about 400,000, from 7.163 million to 6.744 million. Not only public offering funds but also the total amount invested by individual investors in private equity funds declined from 23.9219 trillion KRW to 19.7116 trillion KRW during the same period.

On the other hand, investor deposits, which are standby funds that can be injected into the stock market at any time, have continuously increased. Customer deposits, excluding on-exchange derivatives trading deposits, surpassed 60 trillion KRW for the first time in stock market history on the 31st of last month, and further rose to 63.2581 trillion KRW on the 4th, setting a new record high. As of the 17th, investor deposits recorded 55.6629 trillion KRW, maintaining an average level of about 56 trillion KRW this month. Considering that it was around 25 trillion KRW at the end of last year, this represents more than a twofold increase.

The shift of individual investors from entrusting investments to professionals via funds to engaging in direct investment is analyzed to be influenced by market environment changes triggered by the COVID-19 pandemic. As non-face-to-face culture became routine and lifestyles changed, industrial paradigms also shifted, which acted as a catalyst for increased market volatility. While fund diversification strategies work effectively in typical market environments, during transitional periods when market paradigms change, investing in high-growth individual stocks can be more advantageous. This has created a market environment favorable for individual stock trading, which individuals can relatively easily participate in.

Song Hongseon, Head of Fund and Pension at the Korea Capital Market Institute, explained, "Since COVID-19, leading industries have shifted to platforms, digital, and eco-friendly sectors. In a highly volatile market where industrial paradigms are changing, it may be better to buy specific sectors or leading companies within sectors rather than obtaining average returns through diversification, which leads investors to prefer direct investment over funds."

The stock market's successful V-shaped rebound in a short period also fueled individual investors' enthusiasm for direct investment. The KOSPI hit a bottom at 1,439.43 points during intraday trading in March amid deepening recession fears caused by COVID-19, then began to rebound and has now recovered to the 2,400 level. During this process, the 'Donghak Ant Movement,' which was met with skepticism inside and outside the market, accumulated actual success cases and has acted as a driving force for the continuous wave of individual direct investments to date.

The large-scale loss incidents in private equity funds that have been continuously emerging since last year have also been identified as a cause for investors turning away from funds. Last year, overseas interest rate-linked private derivative-linked funds (DLFs) worth about 800 billion KRW sold by Woori Bank and others suffered large-scale investor losses due to interest rate declines, with some funds losing their entire principal. Subsequently, Lime Asset Management, the largest hedge fund in Korea, was revealed to have sold over 1.6 trillion KRW worth of funds that turned out to be insolvent, leading to suspension of redemptions. Following this, redemption suspensions in private equity funds such as Optimus Asset Management occurred consecutively, spreading investment anxiety from private funds to public offering funds.

Recently, with margin loans exceeding 17 trillion KRW and setting new records daily, direct investment is showing signs of overheating, prompting calls for stable investment strategies through funds alongside direct investment. Oh Kwangyoung, a researcher at Shin Young Securities, said, "As investors' expectations for returns have risen, many investors are dissatisfied with the absolute returns sought by funds in a low-interest-rate environment. While the popularization of investment culture and the increased savvy of individuals compared to the past are positive, there is concern that if the market moves differently than expected, the lack of experience and ability to respond could lead to risks that are difficult to manage."

This content was produced with the assistance of AI translation services.