Mutual funds, or MFs, have become ubiquitous vehicles of choice for investors across the economic spectrum looking to achieve their financial goals. In the past decade, and more so in the post-Covid period, retail investors have taken to MFs of all hues—equity, debt, and hybrid—in their journey towards wealth creation. As we analyse the phenomenal growth of the Rs 61.16-lakh crore industry in recent years, many interesting trends and facets emerge. They also indicate where the industry is headed in the coming decades.
Mutual funds are now steadily catching up with the fixed deposits of banks in terms of assets garnered. An expanding systematic investment plan (SIP) book that is effectively helping domestic institutional investors (DIIs) in cushioning against foreign institutional investor (FII) selling, rapid growth in assets from smaller cities, and a rising share of assets under management (AUM) outside the Top 10 players are key trends.
The one key aspect that the industry may have to work on is to improve upon the relatively short holding period of retail investors in equity funds. Here are key factors propelling the MF industry and the opportunities that lie ahead:
Phenomenal wealth creation journey: The MF AUM has grown at a spectacular compound annual growth rate (CAGR) of 20% over both five-year and 10-year periods till June 2024, and stands at Rs 61.16 lakh crore—Rs 45.35 lakh crore of equity-oriented AUM and Rs 15.81 lakh crore of debt-oriented AUM.
There as many as 46.9 million unique investor accounts and a total of 89.9 million SIP accounts as of June 2024. SIP AUM alone is now worth Rs 12.44 lakh crore, up 57% in the last one year. In fact, the SIP AUM has grown at a staggering annual rate of 35% in the past five years. The SIP book now accounts for 28.7% of the overall AUM of the industry.
For perspective, one of the most preferred financial products of most retail investors—fixed deposits in banks—grew only at an annual rate of 11% over the past five years. MF AUM to bank deposits has risen from 10.7% as of March 2014 to 28.7% as of June 2024, an increase of 2.7x in a little over 10 years.
Rising markets and low interest rates on deposits (of banks) are clearly shifting investor preferences towards market-linked and transparent products such as mutual funds.
Monthly SIP contributions touched Rs 21,262 crore in June 2024, a steep 2.6x jump over Rs 8,122 crore in June 2019. Led by healthy SIP inflows, MFs are now important contributors to market liquidity. In the 12 months to June 2024, net inflow from DIIs was Rs 3.22 lakh crore. However, there was a net outflow of Rs 1.51 lakh crore from foreign portfolio investors (FPIs). DII inflows are dominated by MFs.
Flows from the hinterland: While the MF growth story has been on for a while, what has been heartening to see is that the inflows are coming from smaller cities at a much faster pace than the established top ones.
Currently, the Top 30 (T30) cities contribute nearly 82% of the total MF AUM, while the Beyond 30 (B30) cities account for the rest. Assets from B30 cities have risen 47% year-on-year (YoY) to Rs 11.13 lakh crore as of June 2024. The AUM from B30 cities has risen at a CAGR of 23% between December 2018 and June 2024, while assets from T30 cities increased annually at a slower pace of 18% over the same period.
And B30 investors are willing to take risks. In terms of asset mix, B30 cities have 85:15 ratio of equity to debt schemes, while for T30, it is 46:54. The equity proportion for B30 has risen from 79% in June 2023 to its current level (of 85).
States such as Uttar Pradesh and Rajasthan are now among the top 10 AUM generating states in the country and are growing much faster than the overall industry.
Finally, from the asset management companies’ (AMCs’) perspective, the contribution of players outside the Top 10 is steadily increasing.
From accounting for 16.4% of the overall AUM in December 2019, the share of AMCs outside of the Top 10 has increased to 22.1% as of June 2024, indicating that these companies are catching up swiftly and ensuring a more diffused market share.
The one statistic that the industry would look to improve upon is the holding period in equity-oriented schemes.
Only 53.3% of the industry’s equity assets remain invested for more than two years, which needs to increase sharply.
With a fast-growing economy and a young country with a large workforce and increasing disposable incomes, these trends suggest that the potential for mutual funds to percolate further into the country is very high and Rs 100 lakh crore may be within sniffing distance.
The author is MD & CEO, Edelweiss Asset Management Limited. Views are personal