BS Fund Manager: Will volatile markets put mutual funds to test again?

Equity MFs have emerged as a saviour in domestic markets as FPIs have continued to sell stocks

In 2021, the Indian asset management industry has fared pretty well as equity funds continue to garner investors’ attention. The average assets under management (AAUM) of the Indian Mutual Fund (MF) industry rose to Rs 38.45 trillion as of November end from Rs 29.83 trillion a year ago.

While the AAUM of open-ended debt-oriented schemes stood at Rs 14.91 trillion in November 2021, compared to Rs 14.02 trillion a year-ago, the assets under pure equity funds rose to Rs 13.20 trillion from Rs 8.30 trillion during this period. Flows into equity funds, which is the most profitable segment for asset management companies (AMCs) or mutual fund houses, have been strongly aided by the positive sentiment exuded by markets as well as increasing retail participation in Indian stocks. Investments through systematic investment plans (SIPs, both equity and debt), which are a more stable form of flows, have remained in the limelight and have accelerated since April to touch its highest-ever monthly figure of Rs 11,005 crore in November. Estimates suggest that 90-95 per cent of SIP investments go into equity funds.

Rising net inflows into equity MFs has continued to support the stock markets when foreign portfolio investors (FPIs) are on a selling spree.

However, even as the overall outlook for equity funds holds promise heading into 2022, questions remain on the pattern of flows when the markets turn volatile. Therefore, can the MF industry continue to support the domestic equity markets? Can it build on the gains so far and further penetrate into the semi-urban and rural areas of the country to reach its goal of Rs 100 trillion in overall asset size by the end of this decade? 

Strong flows, resurgence of SIPs

Equity MFs saw a strong bounce-back in the current calendar year in net flows after a tough 2020. Since March this year, equity funds have seen net inflows of Rs 85,381 crore as confidence of investors increased after stock markets rebounded sharply. Market players add that the economic recovery after the disruption inflicted by Covid-19 for most of FY21 also encouraged investors to continue their investments into equity funds.

“Abundant liquidity, low-interest rates, reports of strong corporate earnings growth and the economy opening up and people returning to their ‘nearly normal’ life have all helped build this confidence — and the flows — into equity mutual funds,” says Vishal Kapoor, CEO at IDFC Asset Management Company.

In 2020-21, equity funds had seen net outflows to the tune of Rs 25,967 crore. Eight of the 12 months of the last financial year had seen net outflows from equity funds as investors rushed to book profit in rising markets. However, in the last few months, the volatility in Indian equity markets has failed to interrupt the flows into equity funds; there was net inflow into equity funds even during the harsh second Covid wave around March-May 2021.

“The difference we have seen this time has been that the flow has been consistent, and a fair amount of money did come during the downturn too. The only caveat is that there is a fair amount of inflows biased towards the near short-term returns,” said Swarup Mohanty, CEO at Mirae Asset Investment Managers (India) Private Limited.

An important trend to note here is that even as the flows into equity funds fluctuated due to the prevailing market condition, the inflow through SIPs has remained strong. In fact, in the current financial year itself, inflow through SIPs has been Rs 78,000 crore. For the first time in the industry’s history, monthly SIP flows crossed the Rs 11,000-crore mark in November 2021, after hitting Rs 10,000 crore in September and October. In calendar year 2021 (January-November), the SIP inflow crossed Rs 1.02 trillion.
 

Industry players also believe that the thrust on investor education coupled with a fast recovery of the markets and arrival of new investors have led to steady flows into SIPs.

“In 2008, 50 per cent of the SIPs had stopped due to volatility that lasted longer. In 2020, net asset values (NAVs) recovered faster and hence investors stayed invested. Another key trend is younger investors wanting to be long-term investors and making the right efforts to learn the right process of investing and the digital world exposing them faster to the right insights and advice,” explains Kalpen Parekh, MD & CEO, DSP Investment Managers.

Countering FPI flows, drawing investors during correction

FPIs have been selling Indian equities in the last few months due to concerns over valuation amidst worries over rising Covid cases globally. Indian equity markets have run-up too fast since the start of the pandemic in March 2020.

However, the recent sharp FPI outflows have led to corrections in the market. In the last one month itself the leading indices are down by about 3 per cent (till December 10), and by about 5 per cent from its October peak. 

However, domestic equity fund managers have continued to buy Indian equities. Since October this year, FPIs have sold stocks worth Rs 33,859 crore, while Indian MFs have bought stocks to the tune of Rs 32,909 crore in the same time frame.

But can the flows continue to sustain and will MFs counter FPI outflows going forward?

Kapoor of IDFC MF feels that domestic investors are evolving rapidly, and they increasingly recognise the importance of regularity and consistency in their equity market allocations, as evidenced by steadily growing equity fund SIPs. Such regular domestic flows could continue to act as an important stabilising factor when international investors are selling.

In the earlier market cycles, investors used to redeem from equities when there was a sharp correction in stock prices. Worse, while they were seen selling at lower levels, many also entered the markets when valuations were at their peak. But over the last few years, investor behaviour has gone through a transition, say experts.

The industry, too, has evolved and there is a clear positioning of funds so that investors can make informed decisions and pick the appropriate funds according to their requirement. A few years ago, pure equity funds and some of the debt funds like liquid funds used to be the core part of the portfolio. But now, with the emergence of several different categories of funds, investors have been finding it easy to invest in MFs.

“We are promoting all our hybrid funds extensively and we have a programme called D.A.R.E where we have highlighted the risks in the market along with the means to navigate the same via asset allocation. Our key belief is markets fluctuate and we highlight short-term volatility upfront in our communication. A more aware investor is better prepared to embrace and take advantage of temporary corrections,” explains Parekh of DSP Investment Managers.

There has been an increase in the launch of products such as balanced advantage funds (BAF) and flexicap funds where fund managers have an option to move according to the market condition. The constant nudge from the financial regulator to bring in products that are simple to understand and are “true to label” has also helped the industry as well as the investors.  

In November last year, the Securities and Exchange Board of India (Sebi) had introduced “Flexicap” as a new category of funds. Under this category, fund managers have an option to invest across large-cap, mid-cap and small-cap stocks depending on their outlook for equity markets.

Fund houses were given an option to convert existing schemes into flexicap schemes and many players did it successfully. The AAUM of flexicap category at the end of January 2021 was atRs 78,491 crore, which has since zoomed to Rs 2.21 trillion (as of November).

Money managers have also come out with products like balanced advantage funds and different types of passive funds to attract investors and meet market needs. In BAFs, fund managers take active calls of investing in either debt or equity depending on the prevailing market conditions and the fund managers’ view on the respective asset classes.

If the valuations of markets are high, large portions of assets are typically moved to debt. Later, when the markets turn cheap, the fund managers again invest in equities giving stability to the portfolio. This category of funds has been a huge success as it attracts risk-averse investors. The AAUM of BAFs in November this year stood at Rs 1.67 trillion, up from Rs 93,038 crore in November, 2020.

There has also been an increase in the urge to come up with new kinds of passive funds. Passive funds consistently track a market index, specific asset (like gold) and involve minimal intervention by its fund manager. These are low-cost funds. Earlier, exchange traded funds (ETFs) or index funds were focused only on popular indices such as the Sensex or Nifty. But now, existing and new players are looking to launch numerous passive funds ranging from those focussed on the electric vehicle ecosystem to global focussed funds and silver ETFs.  

With a large offering, MFs too are able to retain investors. All these steps coupled with rising awareness of MF products being potential vehicles for wealth creation have led to investors staying put despite short-term uncertainty.

“One of the key things that was emphasised in our investor awareness programmes is the need to remain unfazed during market turbulence. Through the last four-five years, as investors have participated in mutual funds in droves, they are increasingly understanding this need for such long-term conviction,” said Chandresh Nigam, MD & CEO, Axis AMC.

Long runway for growth

The Indian MF industry has come a long way from having AUM of Rs 6.13 trillion at the end of March 2010 to Rs 38.45 trillion in November. Despite this stupendous growth, the MF penetration continues to remain a concern. Even the AUM of the industry is concentrated only in the top metros of the country. By geography, the top 10 cities contribute almost 70 per cent of the industry’s AUM.

However, India is at a very interesting threshold when it comes to the investing landscape as the demography of the country is changing. There is rapid digitisation across businesses and hence the reach into the country’s hinterland is deepening.

Even the investor behaviour towards asset classes is slowly changing. Indians still have more allocation towards bank deposits, gold and real estate and are gradually looking at financial products like equities (MFs and direct stocks).

“We have seen one of the biggest years for increase in MF folios along with a record high in demat account opening. The ease of transaction is continuing to enable more ownership of financial assets. This trend is set to increase from here. At the same time, we are seeing a host of new product ideas being generated by the industry on the passive side which is seeing consistent growth in inflows too,” said Mohanty of Mirae MF.

Total MF folios as of November was 116.9 million as against 93.6 million a year ago. With the long-term India growth story remaining intact, participants believe that MFs will continue to rise.

According to Kapoor, the MF industry has grown rapidly, but still services just 27 million investors as against the banking industry, which has reported over 1.05 billion accounts. India’s MF AUM as a proportion to its gross domestic product (GDP) is still a fraction of the global average, indicating tremendous opportunity for growth.

“Globally, especially the developed world, the size of the mutual fund industry is a multiple of GDP rather than investment alternates. By that comparison, we have a long way to grow as a financially strong nation. This coupled with superlative wealth creation potential and a burgeoning middle class, the runway for the MF industry is firmly set to top gear,” says Nigam.