MF Unlocked: Should we fear a return to mean?

The frontline indices such as BSE Sensex have shown increased volatility, in the last six months, however, they were up by 4.5 per cent in the same period. Nevertheless, the AUM of the domestic mutual fund industry in the same period has remained stagnant. Even if we take only equity AUM, it has remained almost at the same level that it was at the start of the year. It has increased marginally from Rs. 9.6 lakh crore at the end of January 2018 to Rs. 9.71 lakh crore at the end of June 2018. The reason for such difference in AUM growth and indices growth is the bi-polar nature of the equity market.

We have witnessed that some of the stocks and sectors such as TCS and IT sector have performed exceptionally well, while, other sectors like infrastructure have grossly underperformed the market in the last six months. While in indices, the weightage of outperforming stocks have increased, but same is not the case with many of the portfolios. Therefore, we are witnessing such a divergence in the performance of the funds and indices.

If we increase our period of study to last five years a different picture emerges. Starting June 2013, domestic mutual fund AUM has increased by 2.7 times compared to 1.8 times exhibited by Nifty in the same duration. The AUM has increased from Rs. 8.5 lakh crore to Rs. 23.5 lakh crore in the last five period, while Nifty has moved up from 5,842 to 10,714 level. So, the current move may be indicating a return to mean.

Nevertheless, there is no one to one relation between index and AUM growth, as AUM also constitutes debt funds that do not have a direct relation to the index value. Moreover, AUM also constitutes the entire investment avenues including mid-cap and small-cap stocks that have seen a large fall in their value in the last six months. Therefore, the entire market-cap of Indian equity market is a right indicator to compare.

During the last six months, the Indian equity market cap has fallen by 5.5 per cent from Rs. 1.53 trillion at the start of the year to Rs. 1.45 trillion at the end of June 2018. Here we can see that the AUM growth has surpassed the Indian equity market cap growth. The reason being huge inflows that we have been witnessing in equity funds. For the first six months, total inflows to the equity schemes have been to the tune of Rs. 710 billion. Hence, the current divergence in the AUM growth and indices performance is not a return to mean.