Bull or bear market, MF blitz to continue; CEOs link growth to India's rise

The mutual fund (MF) industry's growth in recent years is based on structural changes in household investment patterns and it is unlikely to see a major slowdown if the equity market were to enter the bear phase, according to the industry. Speaking at the Business Standard BFSI Insight Summit in Mumbai in November, the leaders of some of the country’s largest fund houses said that the momentum in MF inflows could take assets under management (AUM) past Rs 100 trillion in two to three years. AUM is around Rs 67 trillion at present.

 

A panel discussion on the ‘Path to Rs 100 trillion’ included A Balasubramanian, managing director (MD) and chief executive officer (CEO) of Aditya Birla Sun Life MF; D P SINGH, deputy MD and joint CEO of SBI MF; Navneet Munot, MD & CEO of HDFC MF (also chairman of Association of Mutual Funds in India); Nilesh Shah, MD of Kotak MF; and Radhika Gupta, MD & CEO of Edelweiss MF. Edited excerpts:

 

 

The AUM of the mutual fund industry has seen two-fold growth in the last three years to over Rs 67 trillion. When do you see the AUM achieving the Rs  100-trillion milestone?

 

Singh: To put things in perspective, the market has delivered substantial returns during the period when AUM has increased significantly. As a result, mark-to-market gains have also played a role, not just fresh inflows. Given the industry's growth, if AUM has doubled in the last three years, reaching Rs 100 trillion from here would require a 50 per cent increase. Therefore, I believe it should take no more than three to four years to reach this milestone.

 

Munot: There was a time when we celebrated the Rs 100 crore milestone of our funds. Today, daily flows exceed that amount. I remember in 2002 when the industry celebrated crossing Rs 1 trillion AUM, and now we’re talking about Rs 67 trillion. We’ve come a long way.

 

The real satisfaction, however, comes from seeing more money flow in from smaller towns. Even greater satisfaction comes from the growth of our SIP (systematic investment plan) book — from Rs 4,000 crore in 2017 to Rs 24,500 crore today — and the number of unique investors  has reached 50 million. The Rs 100 trillion AUM milestone should be within reach soon.

 

Looking at the pace of growth over the last 20 years, I have no reason to believe the next 20 years won't be just as strong, if not better.

 

Gupta: I believe we should look beyond the Rs 100 trillion mark and set our sights on Rs 1,000 trillion and 500 million investors. The Rs 100 trillion milestone will be reached soon— if not in two years, then within three years.

 

Balasubramanian: I must admit that our past predictions have not been accurate in the past. I remember that at the CII Mutual Fund Summit in 2014 we predicted the industry would reach Rs 25 trillion (AUM) in three years, when the size was about Rs 16 trillion. We exceeded that estimate, surpassing Rs 25 trillion, and reached Rs 50 trillion even faster than expected. So, I believe the Rs 100 trillion milestone will follow a similar path.

 

It’s not just about the Rs 100 trillion size, but about how many customers and households enter the mutual fund industry. That number is steadily rising, which is why the mutual fund industry will remain one of the fastest-growing sectors in finance. The Rs 100 trillion milestone isn't a matter of if but when — whether in three or five years.

 

The strength of the mutual fund industry over the last 10 to 15 years lies in providing investors with the best possible experience, positioning MFs as the primary investment vehicle for Indian savers.

 

As for the possibility of mutual fund AUM overtaking bank deposits, I believe that in the next three to four years, the mutual fund industry will reach 50 per cent of the size of the banking sector.

 

The equity market has been volatile recently due to FPI outflows. If the volatility remains, do you think retail investors will continue to invest aggressively?

 

Munot: Indian markets have performed well recently, with the retail investor being the real hero. The influence of individual investors on MF AUM has grown significantly over the past 10-12 years, rising from under 40 per cent to over 60 per cent. A decade ago, we were criticised for having too much institutional money; now, the reverse is true. This shift is just the beginning of the financialisation of savings, and we still have a long way to go.

 

Despite rising SIP flows, mutual funds and equities still capture only a small share of household savings. Only 5 per cent goes into equities, while 50 per cent go into real estate, 15 per cent in gold, and 15 per cent in bank deposits.

 

To put things into perspective, Rs 24,500 crore per month in SIP flows equals $35 billion monthly — more than (what) foreign investors have ever invested in a year. This highlights the power of domestic money.

 

However, given India’s growth potential, we need both local and global capital. I’m confident we’ll see larger inflows from global investors over time. For now, local investors have the confidence to keep investing. Retail investors are focused on long-term wealth creation, not short-term market momentum, which gives us confidence in the sustainability of these flows.

 

Gupta: There’s often scepticism about the stability of retail investors. Every month, when the industry’s SIP data is released, people question whether it will sustain. But I believe financialisation is structural. Let me share a story. We had 20 people in our office and asked them what they did with their first salary. Those over 35 or 40 said they invested in a recurring deposit, while those under 30 had started an SIP or invested in stocks. This shows how India is changing, and financialisation is real.

 

I often break India into three generations: My father’s generation, which grew up in scarcity; my generation, which waited 15 years for a scooter or landline –transitional India; and today's Blinkit generation, which is far more risk-taking in both jobs and investments. Financialisation and retail investing are just beginning.

 

Yes, in every cycle, 10 per cent of people may make mistakes like getting into things like F&O.

 

Balasubramanian: The investing culture has changed significantly over the past five to six years. Strong equity market performance and economic growth have boosted confidence in equities, particularly through mutual funds. More people are realising that mutual funds offer stable, predictable returns.

 

Confidence is growing, especially after experiences in F&O (futures and options) and other markets. Investors are returning to mutual funds, with SIPs becoming a natural choice.

 

Additionally, people now understand the power of compounding. Mutual funds, over time, often outperform direct investments. This realisation is spreading not only among retail investors but also HNIs (high-net-worth individuals) and family offices, which see mutual funds as a more efficient investment option.

 

This shift has increased retail investors’ risk appetite for mutual funds, especially compared to other options. Mutual funds provide the best returns, liquidity, and experience, even in volatile markets.

 

The trend is irreversible.

 

After 30 years in the mutual fund industry, I can say that earlier the common question during volatility was ‘should I redeem?’ Now, it’s shifted to ‘should I invest more?’ This marks a fundamental change in investor attitudes.

 

Singh: I also believe the trend is irreversible, as seen in the October SIP numbers. Despite market volatility, SIP inflows increased by 4 per cent month-on-month, and if this continues, the annual growth will be 48 per cent. The fact that SIPs are rising in a volatile market gives us confidence that this trend is here to stay. More people will join the SIP movement, and existing investors will increase their contributions.

 

Savings and investments are increasingly blending together. According to the SBI Chairman, mutual fund penetration among the bank’s customers is only 1.8 per cent. Banks know that eventually accounts will become transactional and they will need to add value through products like mutual funds and other investment products. This will give a boost to the SIP book. Additionally, mutual fund distributors, RIAs (registered investment advisor), and robo advisors are also there to sell MFs. Some robo advisory firms are managing 100,000 to 200,000 SIPs per month. With such a strong ecosystem in place, there’s little reason to be pessimistic. This is a multi-decade trend that will continue.

 

Shah: In the movie Lagaan, a local team defeated foreign players in a game of cricket. In a similar vein, a real-life ‘Lagaan’ is playing out in the Indian capital market. During the Covid-19 crisis, we witnessed an ODI (one day international) match, where foreign investors sold around 

 

Rs 80,000 crore worth of equities, while Indian retail investors, largely through mutual funds, absorbed the selling pressure.

 

When foreigners realised they couldn’t outpace us in an ODI, they switched to a Test match format from October 2021 to June 2022. In this period, they sold equities worth Rs 2.5 trillion, but once again Indian retail investors stepped in supporting the market through mutual fund investments. The foreign investors soon realised they couldn’t outlast Indians in a Test match either.

 

Finally, they decided to take on India in a T20 match on election result day. But this time, retail investors decided to go on the offensive. On that day, they directly bought Rs 28,000 crore worth of equities. Additionally, there was another Rs 4,000 to Rs 5,000 crore waiting to be deployed. It was a rare day when buyers outnumbered sellers in the market.

 

Fintechs have seen meteoric rise after Covid-19, but MFs are still largely dependent on banks and distributors to sell products. Is it time for the MF industry to relook at the distribution model?

 

Gupta: In this panel, there are only two AMCs not backed by banks and I represent one of them. There's a myth that mutual fund distribution will only happen through banks, and that people like me and Balasubramanian have no place in the industry. While it's true that bank-backed AMCs have built large franchises, there are now 45 mutual funds in the market, with many more waiting for licences — most of which are not bank-backed. Every time someone asks me why so many are entering the business, I tell them it must be a very good business if 20 new players want to enter. I don't believe distribution can only happen if you're bank-backed.

 

If you look at the leader in SIP volumes in India, the largest is a fintech, Groww. The second one is also a non-bank distributor. This shows that distribution is thriving through various channels.

 

Over the past five years, the mutual fund industry has been incredibly disruptive. I believe that if you're a fund house with good products and a strong digital platform, nothing will stop you from growing because consumers control purchasing power. This is why, for example, we've grown from Rs 6,000 crore to Rs 1.5 trillion in assets.

 

There are many such success stories. Even bank-backed AMCs’ distribution is not limited to their banking channel. Banks are just one part of the distribution puzzle. There are many other avenues, and what we need to focus on is increasing the number of individual distributors. Today, there are around 100,000 distributors, but only 20,000 to 30,000 are active. We need to have a conversation about when India can reach 1 million individual distributors.

 

Balasubramanian: I agree with what Radhika mentioned. I've been part of the Aditya Birla group for 30 years and throughout my career I never felt that our mutual funds lacked a bank as a sponsor. The need to be a bank-promoted AMC was never felt. Mutual funds are built on the strength of the brand, performance, people, and so on. Of course, in recent years, SBI has played a pivotal role in driving growth — SBI, with its vast customer base of 450-500 million, became one of the largest distributors and contributed significantly to the industry’s expansion and acquiring new customers.

 

However, despite this, the banking sector accounts for only about 23 per cent of the AUM. The rest comes from individual distributors, national distributors, and other channels.

 

Looking ahead, while the banking industry will continue to have its own shifting priorities — sometimes focusing on mutual funds, other times on insurance or deposits – the growing wealth effect will lead to more participation from MFDs (mutual fund distributors) in the mutual fund space, as Radhika mentioned. Similarly, the role of RIAs will continue to expand.

 

My belief is that, as the wealth effect rises, the MF distribution industry will become one of the largest sectors in the financial industry over the next few years. This is something we’ve never fully anticipated, but I’m confident that, in the next five years, the distribution industry will emerge as one of the dominant players in the financial sector.

 

Given the changes in Sebi norms for B-30 distributors, is there a need to relook the distribution model? (B-30 are MF distributors who earn an extra commission for bringing in investments from cities outside of the top 30 in India)

 

Singh: I believe T30 and B30 have become just statistical labels at this point, because there’s no longer any real benefit being provided to B30 distributors. First, we need to acknowledge that there's no need for additional benefits for B30, because in the past, it was actually the investors from T30 who were subsidising the distribution efforts in B30. However, there is a strong case for reevaluating the entire remuneration system, particularly since it’s largely based on trail commissions.

 

When we consider bringing new, smaller investors into the market, the acquisition cost is very high. To be fair to distributors, if they are to focus on small-ticket business, they need to receive compensation for acquiring those customers. This is crucial, and it’s something we need to address sooner rather than later. Without a viable business model for small-ticket investments, the dream of increasing the number of distributors from 100,000 to 1 million will remain unattainable.

 

While B30 has seen growth in terms of both numbers and market penetration, the focus should also be on expanding penetration within T30. Take Mumbai, for example – we can't claim that every individual in the city has been reached. Small-ticket businesses and smaller investors still need to be brought into the fold.

 

While T30 and B30 can be useful for statistical analysis and for structuring future strategies, they shouldn’t be the focal point beyond that. The real challenge is making small-ticket business sustainable for distributors and ensuring that we can effectively reach a broader audience.

 

Shah: Banks contribute about 30 per cent of mutual fund AUM, national distributors account for another 30 per cent, and individual distributors hold the remaining 40 per cent. Last year, in the top 10 mutual fund distributors, three were banks and seven were non-banks. Today, platforms like Groww contribute around 10 per cent of the SIP book, totalling $2,500 crore, and 25 per cent of incremental investors.

 

In a country like India, I believe we need a variety of models to reach different customer segments. Banks will have an edge with HNIs and the upper-middle class, while platforms will have an advantage with the lower-middle class and new investors. The concept of T30 vs B30 doesn't matter as much as ensuring a level playing field.

 

Currently, the commission structure for various financial products varies widely, and in some cases, commissions are acting more as incentives to sell certain products, rather than aligning with what’s best for the customer. To create a fair environment, we need a level playing field. Both physical and digital channels will be necessary to reach different customer segments effectively.

 

Being bank-backed, we do have certain advantages but our bank operates on an open architecture model. My largest distributor isn’t the bank – it’s a national distributor. Ultimately, we all need to perform and leverage our distribution channels to reach every segment of the investor base. SIPs and mutual funds have already made a significant impact.

 

Not long ago, The Economist published an article about how people in Jorhat (in Assam) were investing heavily in mutual funds. Who would have imagined that Jorhat could become such a significant investor base? Today, I can confidently say that SIPs have evolved from being ‘Systematic Investment Plan’ to becoming Sab Ichha Ki Pooerti and ‘Mutual Fund Sahi Hai’.

 

Munot: We became bank-owned only a year ago. Prior to that, we were part of HDFC Limited for our entire existence. HDFC Bank, as an associate, has been a pioneer in distributing investment products to its clients. Any AMC with a strong proposition for investors has benefited from HDFC Bank's distribution network. However, in recent years, national distributors, MFDs, and fintechs have grown significantly. If HDFC Mutual Fund has performed well, it’s thanks to decades of track record, a strong distributor network, and a commitment to servicing both distributors and investors.

 

About the B30 segment, over the past 10 years, the industry has grown 8 times and B30 AUM has grown 18 times. Currently, B30 accounts for 19 per cent of the overall AUM, but it represents 28 per cent of equity AUM. More than 30 per cent of incremental equity flows are coming from B30 towns.

 

B30 also plays a significant role in SIPs – 40 per cent of the Rs 24,500 crore SIP book comes from B30, and 46 per cent of folios are from these towns. More than 58 per cent of new SIP accounts are being opened in B30, and for fintechs, that number rises to over 60 per cent.

 

India is a country that remains underserved in terms of financial services but is also digitally empowered, digitally enabled, and digitally aware. This presents a tremendous opportunity for innovation, allowing more people to reach a broader population.

 

I believe this trend will continue in the years ahead. We used to see front-page advertisements from banks announcing the opening of 20 or 25 branches in a single day. You don’t see those ads anymore. But at HDFC Mutual Fund, we take pride in the fact that we opened 24 branches in a single day, on January 2 of this year.