Mutual funds come of age with growing AUM

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Summary

The Indian mutual fund industry first recorded average AUMs of 20 trillion in August 2017 and 40 trillion in November 2022

They are coming from more parts of India; they are embracing periodic investing; they are investing more in equities; and, they are staying invested for long. These are some fundamental changes in retail investors’ approach to investing in mutual funds. These changes have significantly helped the mutual fund industry double its assets under management (AUM) to 40 trillion in about five years and to graduate to new levels of maturity.

The Indian mutual fund industry first recorded average AUMs of 20 trillion in August 2017 and 40 trillion in November 2022. The comparative geographical split around these two timestamps tells a story of how lesser-known parts of India are gaining in representation. Historically, the main metros—home to major corporates, and the cream of small businesses, high net-worth individuals and the salaried—have dominated AUMs. Between September 2017 and March 2023, they ceded share to cities beyond the top 35, shows data from industry body Association of Mutual Funds in India (Amfi).

A similar transition is seen in the breakup by states and Union territories. During this period, 12 states and UTs have lost share, led by historical leaders such as Maharashtra, Haryana, Delhi, and Karnataka. Among states and UTs that have gained share, the largest gains have been recorded by Uttar Pradesh, Gujarat, Madhya Pradesh, Jharkhand and Bihar. While the shift has been under way, it gathered pace during the lockdowns caused by the covid-19 pandemic, as more Indians cultivated an investing habit.

Investing Discipline

In the context of equity investing, systematic investment plans (SIPs)—which entail automatic and preset investments into a mutual fund scheme—are a win-win. For retail investors, SIPs are the best way to invest, as they instil the discipline of investing regularly and for long.

For mutual funds, those very habits lend stability to their AUMs and, theoretically at least, lets them think of portfolio management for the long term.

There’s much to like about how SIPs have grown. Monthly inflows via SIPs have graduated from the 3,000 crore- 4,000-crore band in 2016-17 to 12,000 crore- 14,000 crore band in 2022-23. Of the 83 periods for which month-on-month change can be calculated, SIP inflows increased in 55. SIPs have also not been discouraged by small market dips. That said, their true test of resilience will be a prolonged slump in the stock market, something that this seven-year period has not seen.

Longer in Term

During the industry’s journey from 20 trillion to 40 trillion, the profile of retail investors has improved in terms of holding period, share and composition. Take holding period. Within their equity fund holdings, the share held by retail investors for more than two years—an indication of investing for the long term—has increased from 48.4% in the September 2017 quarter to 56.5% in the September 2023 quarter.

Or, consider share. During this period, Amfi changed the definition of retail investors, lowering the investment floor from 5 lakh to 2 lakh. That means a comparison between the two periods is not a like-to-like one. However, the sum of mutual fund assets held by individuals—retail investors and high net worth individuals (HNIs)—can be compared, and this shows that their share of total industry assets has increased from 51% in the September 2017 quarter to 60% in the March 2023 quarter.

Rising Boats

As of March 2023, retail investors and HNIs held about 17.3 trillion in equity schemes, of which 39% was via SIPs. This is a relatively more stable corpus than non-SIP investments. The equity and SIP boom has lifted most boats in the mutual fund industry, some more than others.

Of the 38 fund houses that were present in both 2017 and 2023, 29 saw an increase in average AUMs, including the 10 biggest.

The substantial movers point to two things. One, even at the very top, there is scope to grow big, a case in point being SBI Mutual Fund rising from fifth to top.

Two, even relative newbies can carve out a space, as shown by gains of Mirae (rank 22 to 10), Edelweiss (26 to 12), PPFAS (35 to 19) and Quant (39 to 23). All this augurs well for the industry.

www.howindialives.com is a database and search engine for public data.

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