Mutual funds are a great way to understand market cycles
Akhil Chaturvedi
Chief Business Officer and Executive Director, Motilal Oswal Asset Management Company
Could you share the core philosophy that drives Motilal Oswal AMC's approach to growth and how it shapes your decisionmaking framework?
Motilal Oswal AMC's approach to growth is driven by its core QGLP philosophy, which stands for quality, growth, longevity, and price. Quality is ensured by setting a minimum threshold for the returns on capital employed (ROCE) and the return on equity (ROE) to invest in fundamentally strong businesses. Growth and longevity are achieved by identifying and investing in sustainable, high-potential themes through a collective decision-making approach within our investment team.
Price is evaluated using a combination of valuation frameworks, including price-to-earnings (PE), price-to-earnings growth (PEG), and discounted cash flow (DCF), along with implied returns and growth projections, ensuring informed investment decisions. Staying true to our high-quality and high-growth investment style, we differentiate ourselves through a disciplined and risk-managed approach. Our risk management framework ensures sustainability by carefully monitoring stock weightage, sector allocation, and overall portfolio composition, keeping the portfolio diversified and capped at approximately 35 stocks.
Additionally, we employ a proprietary trigger-based system for structured profit-taking and stop-loss mechanisms, optimising returns while mitigating downside risks. We focus on efficient liquidity management to further strengthen our investment strategy, ensuring flexibility and responsiveness to market dynamics. By adhering to this disciplined approach, we strive to achieve longterm, sustainable growth while effectively managing risk.
How have mutual funds evolved as a wealth-creation tool for Indian investors?
Mutual funds in India have evolved into a preferred wealth-creation tool driven by regulatory improvements, technology, and financial awareness. Introducing systematic investment plans (SIPs) has enabled disciplined, long-term investing, making mutual funds more accessible. Investors have shifted from traditional assets to market-linked instruments, benefiting from diverse asset classes and tax-efficient options.
Digital platforms have further simplified investing, while SEBI's strong regulatory framework ensures transparency and protection. Today, mutual funds serve as a mainstream investment avenue, helping achieve financial goals efficiently. When we look at the open-ended equity mutual funds, the inflows jumped 14.5 per cent to `41,155.91 crore in December. This reflects the growing confidence of Indian investors in mutual funds as a wealth-creation tool. This is also backed by the fact that January remained in the positive for the 47th month in a row.
What trends are you seeing in retail investor participation, and how is the SIP culture shaping financial discipline?
Retail investor participation in mutual funds has been steadily increasing, driven by greater financial awareness, ease of access through digital platforms, and a shift from traditional savings to market-driven investments. An increasing number of investors recognise the benefits of diversification, professional fund management, and long-term wealth creation, leading to sustained inflows into mutual funds. The growing SIP (systematic investment plan) culture has played a crucial role in fostering financial discipline among the investors. By encouraging regular, consistent contributions, SIPs help investors stay committed to their financial goals while mitigating the impact of market volatility through rupee cost averaging.
This structured approach has made equity investing more accessible and sustainable, reinforcing mutual funds as a preferred vehicle for long-term financial planning and wealth creation. The recordhigh SIP inflows reflect the growing confidence in this approach, reinforcing mutual funds as a mainstream and reliable avenue. When we look at the data, there were over 10 crore SIP accounts in December 2024, which spells 1.9 times growth compared to FY22. The monthly gross SIP flows have also doubled in the last three years to `23,000 crore as per data from December 2024.
Between SIP and lumpsum investments, which one do you think best suits the current market conditions?
In the current market environment, SIPs are better suited for most investors compared to lump sum investments. Given the market fluctuations, SIPs help mitigate volatility through rupee cost averaging, allowing investors to buy more units when the markets are low and fewer when the markets are high. This approach reduces the impact of short-term market movements and encourages disciplined, long-term investing. However, a lump sum investment could be advantageous if an investor has a large sum to invest and the market presents a compelling valuation opportunity.
A prudent strategy in such cases is to stagger the investment using a systematic transfer plan (STP) to spread out the risk. For most investors, SIPs remain the preferred choice, ensuring gradual wealth accumulation, risk management, and the ability to stay invested across different market cycles.
How do you see the role of mutual funds in helping investors navigate volatility and economic cycles?
Mutual funds play a crucial role in assisting investors to navigate market volatility and economic cycles by offering diversification, professional management, and risk-adjusted returns. Through exposure to a mix of asset classes—equities, debt, and Hybrid Funds— mutual funds help investors balance risk and reward based on their financial goals and risk appetite. In volatile markets, SIPs allow investors to benefit from rupee cost averaging, reducing the impact of short-term fluctuations.
Actively managed funds adapt to economic shifts by rebalancing portfolios, identifying emerging opportunities, and mitigating the downside risks. Additionally, Debt Funds stabilise during uncertain times, ensuring liquidity and capital preservation. By maintaining a disciplined investment approach and leveraging expert fund management, mutual funds enable investors to stay invested through market cycles, capitalise on long-term growth opportunities, and build sustainable wealth over time.
Alternative investment funds (AIFs) and portfolio management services (PMS) have gained traction. What growth drivers do you see in these segments?
We have witnessed waves of traction in high-ticket products, especially during the past two years. About a decade ago, the total commitments in the AIF space were about ₹22,000 crore. Today, AIF commitments have soared to more than ₹12 lakh crore, indicating a giant 56 times' rise. PMS AUM has grown more than four times in the same period to more than ₹37 lakh crore. We believe there is abundant opportunity in the alternate investment funds' space with incremental generational wealth moving towards equity from traditional products. As a statistic, the ₹37 trillion PMS AUM is derived from a meagre 2,00,000 clients!
The growth rate in wealth management and advisory outfits portrays the demand potential in our country while supplementing the distribution potential of various financial products, including alternate funds. In the AIF space, we can see that the first and second category types accumulate the lion's share with over 85 per cent of the total commitments raised. We believe that the third category space has a high potential for growth with vanilla equity products being offered. The commitments in this segment have already seen a whopping 98 times rise in the past 10 years.
As we move into 2025, what key trends will shape the Indian mutual fund industry?
The financialisation of savings is the key trend to look out for. As a percentage of household assets, the property is king with a 51 per cent share, with gold and bank deposits holding distant second and third positions at 15 per cent and 13 per cent, respectively. That being said, the total allocation to equities is only about 6 per cent. Despite this low allocation, December SIP contributions marked the highest number in eight years at ₹26,459 crore. The January numbers were affected due to the recent volatility, and yet the SIP contributions last month were the second-highest since FY17 at ₹26,400 crore. With FIIs continually exiting, DII and retail investors have held the fort with comparable buying in the past few years. The MF industry AUM stands at about ₹67 lakh crore, of which equity AUM is about ₹45,000 crore. Mutual funds offer wealth-generation opportunities in the smallest of ticket sizes, not to mention the recently added 'Choti SIP' feature of just ₹250 for new investors. This indicates the clear intent of our regulator to include more and more investors in the industry. Gaps in household asset allocation, rising retail participation and growth in disposable income for middle-class families shall be the key factors contributing to the industry's future landscape.
SEBI has been pushing for better disclosures and investor protection. In this context, how does Motilal Oswal AMC align with these regulatory changes? Our regulator has led the way with initiatives for investor inclusion, awareness and protection. Motilal Oswal AMC has always aligned its operations and workings as quickly as possible to all such regulatory changes and circulars. Investor awareness related to Mid-Cap and Small-Cap fund valuations and premiums, stress testing indicating liquidity information, disclosure of the information ratio, and most recently, the Choti SIP campaign are applauded initiatives to which our AMC has complied fully and fairly within the deadlines. With changing times and rising MF penetration, we can only assume that more awareness programmes and disclosures will be implemented.
Lastly, what advice would you like to give novice investors wanting to invest in mutual funds?
Our recommendation in one word would be: Start. Mutual funds are a great way to understand market cycles, how investing works in different asset classes, and a variety of information available from the fund houses to investors – all this while having an amount as low as ₹500 invested in the market. Investors can utilise collaterals and material published by AMCs in the industry to understand better how, where and why their money is parked. Mutual funds are designed to enable investor awareness and provide multiple information avenues. The provision of SIPs basically allows investors to stagger their exposure in volatile times so that they can start as early as possible and reap the benefits of cost averaging. The important thing to remember is that compounding works better with more time, so the more you give, the better the compounding will work for you.