Mutual benefits

Increasing mutual fund flows is a win-win

The mutual-fund industry crossed the symbolic mark of Rs 50 trillion assets under management (AUM) in December 2023, driven by a strong rally across the equity markets, alongside robust inflows via the systematic investment plan (SIP) route. AUM rose by a whopping 25 per cent with over Rs 1.62 trillion of net inflows into active equity schemes. SIP-linked inflows have hit over Rs 10 trillion over the years. The bulk of the equity MF investment comes from retail investors. The Association of Mutual Funds in India estimates some 42 million individual investors own around 90 per cent of equity mutual fund units. The data indicates the high-decibel “mutual funds sahi hai” campaign has been fairly successful, in conjunction with the Securities and Exchange Board of India’s determined efforts to assure retail investors that their savings are protected. More household savings are being channelled into equity, and flowing in via the safest possible route.

Mutual funds are managed by full-time professionals and the Indian mutual-fund industry is transparent with monthly portfolio updates and daily updates in net asset values. Moreover, the regulator has tightened classifications and oversight to the point where schemes stick close to their stated mandates and expense ratios are low, both due to regulation as well as competition among schemes. The popularity of SIPs ensures investors will average out their cost of acquisition, ensuring better long-term returns for them. SIPs are good instruments in behavioural terms — they commit investors to put their incremental savings into a high-return asset, month after month.

While this indicates fund investors are inculcating good habits, they are still in a minority. While 42 million retail investors (including high-net-worth individuals) is a large number in absolute terms, it is a small sliver of India’s middle-class. Still only a small fraction of the population invests in mutual funds, given that it is possible to invest in tranches as small as Rs 500. Going by the household savings data, financial assets (which include many other asset categories), still form a small component of household savings. The Reserve Bank of India data for FY23 indicates household savings invested in financial assets (net of household debt) amount to only 5.1 per cent of gross domestic product. Mutual-fund assets (including debt funds) comprise just 13 per cent of those financial savings while direct equity investments amount to another 1.6 per cent.

There could be temporary pullbacks in fund commitments if there’s a sustained bear market, as is likely to occur at some stage or another. If cyclical ups and downs are ignored, there is significant room for AUM growth, given that a very large number of households still do not invest in mutual funds. However, since it is extremely easy to set up a folio and to buy mutual fund units from practically anywhere in India, the issues retarding greater fund penetration are centred more on investor attitudes than lack of access. The fund industry has to find ways to educate the “non-participants”, and induce them to trust mutual funds as an asset class. More long-term equity investment via the fund route will enable faster economic growth and would be win-win. Equity as an asset class gives the highest returns across long periods, and entrepreneurship fuelled by equity investment will help boost real investment and enable faster economic growth. Sustained higher flows into mutual funds would reduce dependence on foreign portfolio flows to raise equity capital for Indian firms.