The past couple of decades have seen the Indian mutual funds (MF) industry gain currency and create an edge for itself in the personal finance space, and raise the share of Indian households in the overall savings pie. As per a research note, retail investors prefer to invest through systematic investment plan (SIP) in equity mutual funds.
In the report, ratings agency CRISIL says, "Equity funds have benefitted from money flowing through the SIP route. In fiscal 2020, the mutual funds industry collected about Rs1 trillion through SIPs, up 8% over Rs927 billion collected in fiscal 2019. In the eight months of this fiscal, SIP contributions to mutual funds reached around Rs 629 billion. As of September, aggregate Assets under management (SIP AUM) totalled Rs3.8 trillion."
"While growth of money from SIP has stymied, the industry continues to see sustained investment from the medium led by popularity of equity funds, rising participation of investors and investor education initiatives," it added.
Over the years, according to the research note, the MF industry has seen increased participation from households, as a result of growing awareness, financial inclusion and improved access to banking channels. Between March 2015 and March 2020, the industry grew at a compounded annual growth rate (CAGR) of 16.5% to 89.7 million as on March 2020 folios, driven almost entirely by individual investors, including retail and high net worth individuals (HNIs).
As per data from the Association of Mutual Funds in India (AMFI), beyond 30 (B30), or the next 30 locations beyond the top-30 (T30) cities, contributed 23.7% to the MF industry’s total AUM in September 2020 as against 9.4% in March 2015, illustrating the rising importance of these cities.
Meanwhile, the contribution of T30 to total AUM decreased to 76.3% in September 2020 from 90.6% in March 2015.
The Securities and Exchange Board of India (SEBI) has reclassified T15 and B15 as T30 and B30, respectively, to encompass a broader set of cities that have lower penetration after seeing the share of B15 cities improve regularly in the previous years.
According to CRISIL, after two strong years of net inflows (2017-2018), backed by equity inflows and corporate bond issuances, net inflows into MFs declined in fiscals 2019 and 2020.
It says, "The industry fell prey to the non-banking financial company (NBFC) crisis in fiscal 2019, followed by the Covid-19 pandemic in fiscal 2020. Net inflows declined to Rs 870 billion in fiscal 2020 from Rs3,430 billion in fiscal 2017, after major outflow in the last month of the fiscal. The last quarter of fiscal 2020 saw pandemic-triggered sharp outflows led by liquid funds. In April 2020, closure of certain debt schemes by a mutual fund resulted in further outflow from debt funds, but liquid funds bounced back with a net inflow of Rs744 billion year to date (YTD) in the current fiscal."
Pandemic-induced developments notwithstanding, CRISIL says as economic activities slowly resume and gather pace, businesses should see heightened requirement of funds. "Thus, liquid and arbitrage funds might witness pressure again due to outflows."
"In addition, corporates are expected to reduce their exposure to debt funds, at least in the riskier categories. In the long term, with expectation of higher returns from the capital markets, fund flow into equity funds is expected to pick up. Increasing share of mutual funds in household savings, driven by expectations of higher and stable returns, is one of the key contributors of fund inflows, especially into passive and equity funds," the ratings agency says.
The ratings agency also feels that through 2025, the assets under management (AUM) of MF industry will continue its double-digit growth and cross the Rs50 lakh crore mark.
Ashu Suyash, managing director (MD) and chief executive (CEO) of CRISIL, says, "Equity funds are expected to vanguard this growth trajectory, with their share expected to rise from 42% today to 47%, in line with global peers. The growth triggers include India’s favourable demographics, increased financialisation of savings, an inflation-targeting regime, and rising per-capita income. For this growth to sustain, independent research, data, and analytics will have to play a material role in empowering investor decisions."
According to the ratings agency, appropriate and timely investor decisions are a pre-condition for holistic, sustainable growth of the domestic MF industry, and independent MF rankings can play an important role in this.
“When selecting funds, it’s important for investors to look at the attributes of the underlying portfolio, too, and not just focus on a performance yardstick like net asset value (NAV). For example, a high percentage of debt funds with significant exposure to defaulted papers since mid-2018 were ranked low at CRISIL mutual fund ranking (CMFR) 4 and 5 – when the underlying papers defaulted – compared with the higher rankings given to them elsewhere based on just NAV. Such well-rounded CMFR insights help stakeholders take timely decisions," Amish Mehta, chief operating officer (COO) and president of CRISIL, concludes.
