By Patturaja Murugaboopathy and Chris Thomas Feb 24 (Reuters) - India's retail investors are ditching mutual funds to put money directly into stock markets, lured by soaring share prices and lacklustre returns at mutual funds in recent years. Domestic investors have withdrawn 275 billion rupees ($3.80 billion) from equity mutual funds in the year to Feb. 16, according data from the Securities and Exchange Board of India (SEBI), after dumping a total of 545 billion rupees in 2020. Meanwhile, the number of 'demat' accounts, which contain retail investor holdings in securities in electronic format, increased 27% last year to stand at 49.8 million at the end of 2020. "In India, something special is taking place. Retailers have taken money from domestic funds and started to buy stocks themselves. They have driven the market higher," said Herald van der Linde, head of equity strategy, Asia Pacific, at HSBC. The rise in demat accounts comes as millennials, faced with job losses and pay cuts due to the COVID-19 pandemic, dabble in stock markets directly to try to make some extra income while staying at home. A large number of blue-chip shares were available at multi-year lows after a sell-off in March last year. Some of the most battered large-cap stocks, such as Reliance Industries RELI.NS and State Bank of India SBI.NS , have more than doubled in price since March. "An investor like me won't go with a mutual fund in this scenario, especially large cap mutual funds. I'd prefer to invest directly," said Ashish Mishra, a retail investor based in Gurgaon. The aversion towards mutual funds is also due to their higher management fees and low returns. According to Refinitiv Lipper data, the average return over a 3-year period for the 498 mutual funds surveyed was 2%, much lower than the 12% return for the NSE Nifty 50 index .NSEI in that period. A polarised rally has also affected the performance of mutual funds. The top 10 stocks by market capitalisation in the Nifty 50 index accounted for two-thirds of the price gains over the past year. "Investors who bought into stocks during the pandemic have seen gains of 30-40%, so we believe this trend of investing direct versus mutual funds will continue," said Nikhil Kamath, co-founder and chief investment officer of India's biggest stock broker Zerodha and asset management firm True Beacon. ($1 = 72.2850 Indian rupees) <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Mutual fund redemptions vs rising demat accounts https://tmsnrt.rs/3kpyaMA Equity mutual funds vs Nifty 50 returns https://tmsnrt.rs/3aLetvg Biggest contributors to NSE Nifty's market value in last 1 yr https://tmsnrt.rs/2ZLuY4c ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> (Reporting By Patturaja Murugaboopathy and Chris Thomas in Bengaluru, with additional reporting by Gaurav Dogra Editing by Vidya Ranganathan and Ana Nicolaci da Costa) ((patturaja.murugaboopathy@thomsonreuters.com;))