The year when mutual funds marched ahead

Consistent growth in folio count and unprecedented peak inflows from systematic investment plans serve as a testament to growing investor confidence and surging retail participation. Mint captures the key highlights of the mutual funds industry in 2023.

 

Rising assets

The mutual fund industry’s assets under management (AUM) climbed to a new peak of ₹49 trillion in November, led by impressive growth in equity funds amid bullish market sentiment and strong inflows. Equity assets (including index funds) in November were up 32.3% from a year earlier.

Since January, equity-oriented schemes have seen net inflows of ₹1.4 trillion, a tad lower than ₹1.5 trillion in the same period a year ago. Slower redemptions of late also point towards growing confidence among investors, which has pushed up the net flows-to-redemptions ratio significantly.

Rupesh Patel, senior fund manager for equity investments at Nippon India Mutual Fund, attributes these trends to limited investment options to generate higher post-tax returns and the “long-term track record of wealth creation", as well as “growing awareness, transparency, ease of investing and low cost" of mutual funds as an investment option. He said these factors would keep domestic investors hooked to equity markets.

SIP power

The growing momentum in SIPs is another attestation of sustained belief among investors. SIP contributions grew consistently over the previous five months, reaching an all-time high of ₹17,073 crore in November. In 2023 so far, inflows through SIPs, at ₹1.7 trillion, have already surpassed the entire inflows through this route in 2022.

Further, SIPs’ AUM recorded a 36.2% year-on-year growth in November, while 31.1 million new SIP accounts have been registered in the year so far. The monthly average of nearly 3 million was sharply up from 2.2 million in 2022.

“Over the years investors have seen various market cycles and possibly have recognized the importance of staying invested and using a systematic approach to investing rather than trying to time the market," said Ankit Agarwal, fund manager at UTI Asset Management Co. Contribution from SIPs has risen despite worryingly high valuation levels in the markets.

Retail play

Growing participation of retail investors has been instrumental in catapulting the mutual fund industry. Quarterly disclosures by the Association of Mutual Funds in India (Amfi) showed retail investors had a little over 25% share in MF assets, and together with wealthy individuals held almost 61% share as of September.

The retail segment maintains a clear dominance in folios, with a 91.2% share. Between November 2022 and November 2023, the value of assets held by individual investors, including wealthy investors, in mutual funds increased by around 24%. Individual assets were primarily invested through the conventional route of going via distributors.

About 55% of the assets of these investors are from the top 30 cities brought in by distributors, Amfi data showed. Direct investments (those bought independently, and not via distributors) amount to 24% of individual assets. Equity-oriented schemes derive 89% of their assets from individual investors.

Small is big

Another emerging trend among equity mutual funds this year was the concentration of inflows in categories such as smallcap and midcap funds.

Large-cap funds faced hardships with net outflows to the tune of ₹3,752 crore in the 12 months ended November. Of the total flows into equity-oriented schemes in the last one year, small-cap funds accounted for about one-fourth, followed by midcap (16% share) and “large and mid-cap" funds (12%).

Further, based on trailing returns, smallcap and midcap funds have overshadowed large-cap funds in the one-year, three-year, five-year and 10-year periods.

“The valuation premium that the mid-cap index trades at with respect to the large-cap index is now close to a 10-year high," said Agarwal of UTI Asset Management. “Considering the principle of reversion to the mean, we believe that some of the premiums could possibly reverse in future."

Sectoral bets

In order to chase big returns, mutual funds often rejig their portfolios. This year they bet big on stocks from the construction sector, with a higher portion of their AUMs deployed in this segment than in the year prior. The AUM in this sector grew nearly 51% in September, on a year-on-year basis, the latest data published by the Securities and Exchange Board of India showed.

Equity funds also remain bullish on segments such as banking and information technology.

“Large-cap financials have significantly underperformed broader markets in recent times," said Patel of Nippon India Mutual Fund. “However, fundamentals for them continue to remain robust and valuations reasonable. Discretionary consumption and power are other themes that look attractive."

The engineering segment, meanwhile, seems to be falling out of favour: the AUM deployed in this sector declined to nearly ₹28 crore in September from ₹625 crore in the corresponding month last year.