From evolution to revolution: Understanding the trends and transformations in the mutual fund industry

The article is authored by Nityanand Prabhu, Executive Director and Business Head of LIC Mutual Fund Asset Management Ltd.

If the current industry trends are anything to go by, the Indian mutual fund (MF) industry’s assets under management (AUM) are expected to reach the Rs 100-lakh-crore mark soon. The historical data has shown that the doubling of assets doesn’t need a long period. In the past fiscal (FY24), the MF industry saw a sharp jump in their AUM to a record Rs 53.40 lakh crore compared with Rs 39.42 lakh crore in FY23, which is a gain of 35 per cent. The AUM stands at Rs 57.26 lakh crore as of April 30 this year (source: AMFI).
 

If we look at the growth trajectory, as per AMFI it is evident that the AUM growth is exponential. The assets had grown more than six-fold -- from Rs 9.45 lakh crore in April 2014 to Rs 57.26 lakh crore in April 2024 – in a decade. The AUM had crossed the milestone of Rs 10 lakh crore in May 2014, and in three years it doubled to Rs 20 lakh crore in August 2017. Again, in three years, it touched Rs 30 lakh crore in November 2020, and in less than four years it reached Rs 57.26 lakh crore.

The total number of folios (MF accounts), as of April 30, stands at Rs 18.15 crore. Investor’s preference to Systematic Investment Plan (SIP) continues to rise with monthly net inflows touching Rs 20,371 crore in April this year. In FY24, the net SIP inflows were at Rs 1.99 lakh crore compared with Rs 1.55 lakh crore in the previous fiscal year. Currently, domestic MFs have about 8.70 crore SIP accounts through which investors regularly invest in MF schemes.

A significant factor that triggers the AUM growth is the positive sentiments on the bourses. Ostensibly, domestic households are keen to join MF schemes as they want to increase their capital market exposure to cash in on the market surge. The three major categories of MF -- equity, hybrid and solution-oriented schemes – are leading the growth and collectively account for 58 per cent of the assets at the end of the past fiscal year.

Performance of various asset classes and fund categories
For prospective investors, understanding how various asset classes and fund categories performed in the past is very crucial to navigating the MF landscape. According to AMFI data, equity-oriented schemes were seen as the bellwethers in FY24 and they grew 55 per cent to Rs 23.50 lakh crore due to strong fund inflows and mark-to-market (MTM) gains. This category witnessed net inflows of Rs 1.84 lakh crore in the past fiscal year, up from Rs 1.47 lakh crore in FY23. It also benefited from sharp growth in the underlying equity valuations, leading to higher MTM gains.

Flexi cap funds
Flexi cap was the largest fund category with Rs 3.50-lakh-crore AUM as of March 2024, followed by Large-Cap funds with Rs 3.14-lakh-crore assets. In growth terms, multi-cap funds saw the highest growth of 85 per cent in the past fiscal year, followed by Small-Cap funds at 82 per cent.

Sectoral and thematic funds
Sectoral and thematic funds saw the highest inflows during the past fiscal at over Rs 46,000 crore, followed by the small-cap category with net inflows of over Rs 40,000 crore. However, the small caps saw marginal outflows recently due to fears of over-valuation, and profit booking.

Hybrid Funds
Hybrid funds crossed the Rs 7-lakh-crore mark in the past fiscal with asset gains of over 50 per cent. According to a recent AMFI report, in the hybrid category, arbitrage funds saw the highest inflow of Rs 90,000 crore during the past fiscal year with assets up by 127 per cent. Investors also adopted other hybrid categories such as multi-asset allocation, equity savings fund, and dynamic asset allocation (balanced advantage funds) categories, registering a growth of 153 per cent, 85 per cent and 30 per cent, respectively.

Within the hybrid fund category, dynamic asset allocation funds emerged as the largest category with assets worth Rs 2.50 lakh crore at the close of the past fiscal.

Passive funds
Passive funds also registered a growth in AUM and the segment continued to benefit from the institutional investment flows into exchange-traded funds (ETFs). ETFs, as a category, have assets worth Rs 6.64 lakh crore as of March 2024.
 

Debt Funds
Debt funds saw only moderate growth of 7 per cent in FY24 and closed with assets worth Rs 12.62 lakh crore. This category also gained in folios as investors retained their confidence in the segment despite the removal of indexation benefits. In terms of asset growth, money market and liquid funds saw the highest absolute asset gain of Rs 40,000 crore and Rs 31,000 crore, respectively. Among other categories, long-duration funds saw 45 Sectoral and thematic funds growth to close with Rs 12,700 crore assets. However, overnight funds were down by 36 per cent in the debt category.

Debt funds may seek more traction after the inclusion of the Indian government bonds (G-Sec) into the JP Morgan Global EM Bond Index from June this year. The G-Sec inclusion in Bloomberg’s EM Local Currency Government indices is expected to happen only next year. But both inclusions may facilitate increased foreign fund flows to the government securities, which may rejuvenate the debt fund market in the country.

Another factor for debt funds is India’s falling fiscal deficit. It will further consolidate global investor confidence in the country and strengthen the macro indicators. Notably, the higher dividend payout of Rs 2.11 lakh crore by the RBI may also offer a breather for the Centre to manage the deficit in the current fiscal year.

Conclusion
Thus, we may say that MF AUM over the years is set to increase, and we will also get the participation of a larger audience even from beyond the top 30 cities. Mutual funds will form a big part of the investor’s portfolio in the coming future.

• The information provided is based on data from AMFI (Association of Mutual Funds in India).
   

Disclaimer: The opinions expressed above are personal and may not reflect the views of DSIJ.