Trends That Will Shape The Indian Mutual Fund Industry

The Indian mutual fund industry has seen significant growth in recent years, with several seasoned and new investors parking their funds to grow wealth. With the current market conditions, it is important to stay updated on the latest trends and developments which will shape the future of the mutual fund industry. In this special report, Vardan Pandhare highlights the key trends that will shape the Indian mutual fund sector in the times to come

The Indian mutual fund industry has experienced various changes since its inception in 1963. The MF industry's sixty-year timeline, from 1963 to 2023, can be categorized into five distinct phases, each of which aimed to promote saving and investment.[EasyDNNnews:PaidContentStart]

A Brief History

The first phase, which lasted for 23 years, was solely controlled by UTI, a government organization. The second phase began in 1987 when public sector banks initiated the issuance of MFs. Over the course of six years, from 1987 to 1993, the assets under management (AUM) grew at a compound annual growth rate (CAGR) of 38.4 per cent, indicating an increase in investors' trust and acceptance. The third phase, lasting 10 years from 1993 to 2003, was crucial for MF growth in India. Private sector firms were permitted to issue MFs, resulting in a dramatic increase in the number of MFs and AUM.

The fourth phase (2003-2014) was a challenging period for the MF industry due to the global financial crisis, which undermined investor confidence and resulted in reduced growth. To restore investor confidence, the Securities and Exchange Board of India (SEBI) launched several measures in the fifth phase, beginning in 2014. The Indian MF industry witnessed consistent inflows because of SEBI's efforts. As of January 31, 2023, the industry's AUM stood at ₹39.62 lakh crore, with over 14.2 crore folios and 6.2 crore active systematic investment plan (SIP) accounts. While SEBI's regulatory efforts aided in this growth, last-mile connectivity was made possible by distributors, agents, and technology, which helped broaden the retail investor base. 

Forthcoming Trends

Here are the trends that will shape the Indian mutual fund sector in the times to come.

Increase in Digital Adoption - With the rise of digital platforms and the growing importance of technology in the financial industry, it is no surprise that the Indian mutual fund sector is also seeing an increase in digital adoption. A range of digitally advanced analytical, ranking, and tracking solutions are available in the market that help with screening, evaluating, comparing, monitoring, and tracking of mutual funds.

Growth in SIPs -

Systematic investment plans (SIPs) have become increasingly popular in the Indian mutual fund sector in recent years. They have remained robust even during the volatile market condition. They remained the pillar of strength for the Indian equity market when there was an exodus from the FIIs. SIPs allow investors to invest a fixed amount at regular intervals, rather than investing a lump sum. This investment strategy is particularly popular among first-time investors and those looking to invest in mutual funds over a long period of time. With the growing popularity of SIPs, mutual fund companies are now offering various options and plans to attract more investors. At the end of FY22, there were 6.28 crore MF SIP accounts, the total sum collected through SIP during March 2023 surpassing ₹14,000 crore to reach ₹14,276 crore. 

Focus on ESG Funds -

Environmental, social and governance (ESG) funds are becoming increasingly popular among Indian investors. These funds invest in companies that meet certain criteria related to environmental, social, and governance practices. As more and more investors are becoming conscious of the impact of their investments on the environment and society, mutual fund companies are now offering more ESG fund options to attract these investors. Currently, there are only a few fund houses that offer thematic funds based on ESG. 

Rise of ETFs -

Exchange-traded funds (ETFs) are becoming increasingly popular among Indian investors. ETFs are like mutual funds, but they are traded on stock exchanges, like stocks. ETFs offer investors the ability to diversify their portfolios, as they can invest in a basket of stocks, bonds, or other securities. With the growing popularity of ETFs, mutual fund companies are now offering more options to attract these investors. More than 160 ETFs are on offer currently.

The Indian mutual fund sector is witnessing an increase in digital adoption, growth in SIPs, focus on ESG funds, and rise of ETFs. These trends are shaping the mutual fund industry in India and are expected to continue in the future. For all stakeholders of the mutual fund industry, it is important to stay updated on these trends and developments and maintain a 360-degree view of the industry.

Growth Triggers -

The Indian mutual fund industry is expected to double in size over the next five years as it enters a high-growth phase. This growth is driven by five key factors that will have a positive impact on mutual funds. The first factor is India's economic growth, which is projected to increase fastest among major global economies. This economic growth, along with a rise in the middle-income population and an increase in financial savings, is expected to boost the mutual fund industry in India. The second factor is financial inclusion and investor education. Regulatory and government initiatives aimed at raising financial awareness among the masses will lead to higher penetration of mutual funds. 

Steep Rise in MF Inflows since 2014

∎ The Indian MF industry has experienced a steady inflow and rise in AUM since May 2014.
∎ The AUM crossed ₹10 lakh crore for the first time by May 31, 2014, ₹20 lakh crore for the first time by August 2017 and ₹30 lakh crore by November 2020.
∎ From June 2012 to June 2022, the overall MF industry size has grown from ₹6.89 lakh crore to ₹35.54 lakh crore.
∎ From June 2017 to June 2022, the MF industry has grown two times.
∎ The number of investor folios has gone up from 5.82 crore to 13.47 crore from June 2017 to June 2022.
∎ The total number of SIP accounts crossed the one crore mark in April 2016 and as of June 2022 the total number of SIP accounts was 5.55 crore.
∎ The growth in the MF industry has been possible due to the regulatory measures taken by SEBI in September 2012 and the support from mutual fund distributors in expanding the retail base.
∎ Mutual fund distributors have played a significant role in popularizing SIP plans, and they connect with investors in smaller towns, helping them stay invested during market volatility and experience the benefits of investing in mutual funds.

MF Inflows till April 2023

The Association of Mutual Funds in India (AMFI) released data on the mutual fund sector in April 2023 that included several significant findings.
∎  In April 2023, equity mutual funds saw a net inflow of ₹5,275 crore as opposed to ₹20,190 crore in March 2023.
∎  Small-Cap mutual fund schemes witnessed the largest investments in April, despite net inflows across the board for equities mutual fund schemes. Large-Cap funds had the least amount of inflows.
∎  In April, debt mutual funds had a dramatic reversal thanks to a significant net inflow of ₹1,06,677 crore. In all other categories excluding credit risk, banking, and PSU funds, there were net inflows. This followed a huge outflow of ₹56,884 crore for the category the previous month.
∎  Maximum net inflows are received by liquid funds. Money market funds had inflows of ₹13,961 crore in April, while liquid funds saw inflows of ₹63,219 crore. ₹10,661 crore were invested in the ultra-short-term fund.

Better risk management and transparency within the mutual fund industry will also boost investor confidence and lead to increased investments and growth in the industry. The third factor is retirement planning and tax benefits. Retirement planning is an untapped market in India, and if channelled through mutual funds, has the potential to significantly improve penetration among households. The tax benefits of Equity Linked Savings Schemes (ELSS) are also likely to boost the growth of mutual funds as more and more people join the formal sector.

However, there are also risks and challenges that the mutual fund industry faces. Downturn or volatility in mutual funds and other market-linked products, competition from other financial instruments such as ULIPs, and the high cost of retail expansion are a few challenges that the industry faces. Finally, political instability or a shift away from the pro-growth policy could impact growth and global trade. Therefore, it is important for the mutual fund industry to be aware of these risks and challenges and take steps to address them to ensure continued growth in the coming years.

Conclusion

The future of mutual funds in India appears to be very promising. The number of different schemes offered by various institutions has grown significantly from around 200 to 1,000, making mutual funds more accessible and attractive to every category of investors. This evolution is expected to continue, leading to even more investors entering the market. Additionally, the rapid development of the fintech industry has made it easier for people, even those in remote areas, to access financial markets.

The availability of a wide range of schemes is beneficial to investors with different risk appetites. Despite challenges such as growing inflation, liquidity tightening by global central banks, interest rate hikes, and major geopolitical tensions, the mutual fund industry in India showed steady growth in last few years and market analysts expect the mutual fund industry in India to grow at a CAGR of 21.5 per cent by 2027.

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