Subdued equity market slows mutual fund penetration, shows data

Mutual funds fail to carry high growth momentum of FY22 due to changed market conditions

After registering a strong retail business growth in the last financial year, the mutual fund industry is witnessing a slowdown.

New investor addition and net SIP account registrations are down 30-40 per cent year-on-year (YoY) in the first half of the financial year. Growth in SIP inflows is also not as steep as the year before.

In the first half of this financial year, the industry has added 2.4 million investors compared to 4 million during the same period a year ago, according to data from the Association of Mutual Funds in India (Amfi).

Net SIP account addition is also down from 7.6 million to 5.6 million.

Also, inflows through the SIP route, which rose 20 per cent in the first half of FY22, has gone up by only 9 per cent this year.

For the industry, the slowdown has not come as a surprise given the change in the equity market movement, from a strong rally in the first half of FY22 to a range-bound market.

“Number of new investors entering the market, be it via direct equity or managed equity like mutual funds, has a strong correlation with the performance of the markets. As the market has been sideways for the last couple of quarters, the new demat account or folio additions have moderated," said Kedar Deshpande, head – retail distribution, ICICI Securities.

The stock market has moved within a small range in the last one year, resulting in poor performance of equity schemes. For instance, the biggest equity fund category flexicap has given an average return of only 0.8 per cent in the last one year (as on October 28), according to Value Research data.

In comparison, most equity schemes were sitting at double-digit one year returns during most phases in FY22. This helped asset management companies (AMCs) and MF distributors attract a hoard of new investors.

The industry came out with a total of 56 NFOs in the first half of FY23 compared to 53 during the same period last financial year. However, the collections are drastically down to Rs 16,000 crore this year from Rs 54,000 crore a year back. The 70 per cent decline in collections indicates a much lower investor participation.

“The absence of major launches has surely weighed down the pace of new investor addition. Moreover, equity schemes haven't done well in recent times, leading to subdued investor sentiment,” said Vinod Jain, principal advisor at Jain Investment Advisors.

On the decline in net SIP additions, Jain said that investors are finding it too difficult to start new SIPs. This is because inflation has raised expenses and high interest rates have raised equated-monthly instalments (EMIs).

“A lot of investors pay home loan EMIs, which have gone up post the rate hikes. As a result, investors are struggling to start more SIPs," Jain said.  

A higher number of investors have been dipping into their mutual fund savings in the past few months to make big-ticket expenditures like buying a house.

In September, investors pulled out Rs 6,578 crore from their SIP accounts, the highest in the past 11 months.