Embracing Stocks for Long-Term Growth

The Indian equity market has exhibited extraordinary steadiness amidst global volatility, setting it apart from its international counterparts. This resilience becomes evident when analysing the drawdown figures. It showcases the Indian equity market’s superior performance compared to several others in the period spanning the last two years until June 2023. Notably, the BSE Sensex, representing the Indian equity index, outshines its peers by experiencing a relatively limited maximum drawdown of only -16.85 per cent.

This remarkable achievement demonstrates the Sensex’s ability to maintain its resilience even during challenging market conditions. In stark contrast, other prominent indices like the Hang Seng index (-47.02 per cent), Nasdaq Composite (-36.40 per cent) and DAX 30 (-26.40 per cent) endured more substantial drawdown. The BSE Sensex’s remarkable capacity to mitigate losses emphasises its superior performance and underscores its strength in navigating market downturns. 

One of the contributing factors that played a significant role in mitigating the decline of the Indian equity markets was the substantial inflow from domestic institutional investors, including mutual funds. Historically, the Indian equity market has been susceptible to the influence of foreign portfolio investors (FPIs), resulting in increased volatility and fluctuations in investor sentiment. However, the expanding retail investment through mutual funds has emerged as a robust defence mechanism against global factors. In the last few years, retail investors have shown great faith in the equity market and continued investing despite all the short-term volatility witnessed in the domain.

Rise of Retail Equity Investors
Traditionally, Indians have favoured fixed-income instruments, exemplified by their inclination towards bank fixed deposits, which comprised 41 per cent of the household savings pie as of March 2022. However, this trend is gradually evolving as investors in the country embrace capital market products. Notably, the share of equity investments has increased from 24 per cent in fiscal 2017 to 31 per cent in fiscal 2022. This changing investment landscape signifies a growing openness among Indian investors to explore different asset classes, moving beyond traditional fixed-income avenues and embracing the potential benefits offered by equities.

One of the preferred routes by retail investors to have exposure in equities is mutual funds. Based on data published by the Association of Mutual Funds in India (AMFI), it is apparent that mutual fund AUM in India has witnessed consistent growth. The total assets have steadily increased month after month, reaching a figure of Rs 44.39 lakh crore at the end of June 2023. This upward trajectory signifies the growing popularity and trust placed in mutual funds by investors, especially by retail investors.

The rise in mutual fund AUM can be attributed to various factors including proactive regulator, increased awareness and understanding of mutual fund investments, investor preference for diversification and the convenience and accessibility provided by mutual fund platforms. As individual investors recognise the potential for wealth creation and long-term financial planning through mutual funds, the industry continues to expand. The month-wise increase in total assets demonstrates a positive trend, indicating the growing confidence of investors in mutual funds as a reliable investment avenue. 

This is further exemplified by the share of individual investors AUM in the total AUM of the industry. Individual investors now hold a relatively higher share of industry assets, i.e. 57.7 per cent in May 2023, compared with 55.0 per cent in May 2022. Till a couple of years ago it was below 50 per cent. 

Some of you might be wondering why retail investors might be holding more Debt Funds while migrating from banks fixed deposits. Nonetheless, it is not the case. A typical individual investor primarily holds equity-oriented schemes while institutions hold liquid, debt-oriented schemes. For an individual investor, 79 per cent of the investor assets are held in equity-oriented schemes. Against this, 60 per cent of institutional assets are held in liquid or money market schemes and debt-oriented schemes. This clearly shows that retail investors are putting their savings more towards the equity part to fulfil their financial goals.

Another set of data that highlights this is the increase in the share of mutual funds and equity in households’ financial savings, particularly in 2021-22. The share of mutual funds in households’ financial savings stood at 6.3 per cent, a more than 4 per cent rise from 2020-21. The record rise in MF investments came amidst a boom in the stock market in 2021. Though the pace of increase has declined in the last one year, it is likely to regain momentum in the recent rally in the equity market.

MFs Gain as SIPs Proliferate
The monthly systematic investment plan (SIP) figures have shown remarkable growth, achieving a compounded annual growth rate (CAGR) of 24 per cent since April 2016. The data reveals a consistent and upward trend in monthly SIP investments over the years, reflecting the increasing interest and participation of investors in this disciplined investment approach. Starting at Rs 3,122 crore rupees in April 2016, the SIP amount steadily climbed to Rs 14,734 crore rupees in June 2023. This consistent growth in SIP investments indicates a growing awareness among investors about the benefits of regular and long-term investment, which helps them ride market fluctuations and potentially generate significant wealth over time.

Investors are operating new accounts at a record pace to participate in the market rally at a smaller ticket size. New SIP account registrations reached a record high of 27.8 lakhs in June 2023, as per data from the AMFI. It surpassed the previous high of 26.8 lakhs in September 2021. On an average,about 21.2 lakh new SIP accounts per month were opened over the past 12 months, thus taking the cumulative addition to 2.6 crore. The average ticket size of these accounts dropped to Rs 2,214 in June compared with Rs 3,304 five years ago. The net SIP account registrations were 1.25 million in June, the highest in 18 months.

The total SIP accounts reached 6.7 crore. Consistent inflows and the current rally in the stock market have lifted the average portfolio value of SIP accounts to Rs 1.2 lakhs, the highest in 20 months. The SIP inflows were above Rs 14,000 crore for the second consecutive month in June. As a result, the 12-month cumulative SIP inflows were at a record Rs 1.6 lakh crore. A combination of inflows and capital appreciation helped the assets under management (AUM) of the SIP-linked funds to hit Rs 7.9 lakh crore in June. The rising popularity of SIPs in India signifies a shift towards more systematic and sustainable investment practices among individuals seeking to achieve their financial goals through disciplined and consistent contributions.

The table alongside provides insights into the growth of SIP assets under management as a percentage of the total mutual fund AUM in India over the last couple of years.

The figures illustrate the growth of SIP AUM in crore rupees and its corresponding proportion in relation to the total AUM of mutual funds in India. The percentage values demonstrate the SIP AUM as a share of the overall AUM. Examining the data, it is evident that the SIP AUM has been gradually increasing over the period, indicating a rising preference for systematic investment plans among investors. In June 2023, the SIP AUM reached Rs 7.94 crore, constituting 17.88 per cent of the total AUM and almost 55 per cent of the equity AUM. 

This demonstrates the significant contribution of SIP investments to the overall mutual fund industry. The consistent growth in SIP AUM across the preceding months further reinforces its prominence, highlighting the increasing popularity of this investment method. By analysing the data, it becomes evident that investors are increasingly embracing SIPs as a preferred investment avenue, contributing to the growth and stability of the mutual fund industry in India.

Tips for Choosing an Equity Mutual Fund
1. Consider your Risk Profile : Equity mutual funds are considered to be a risky investment, so it is important to consider your risk profile before investing.
2. Do your Research: Before investing in any mutual fund, it is important to do your research and understand the fund’s investment objectives, risk profile and track record.
3. Choose a Fund Suitable for your Needs: There are many different types of equity mutual funds available, so it is important to choose a fund that is suitable for your needs.
4. Start Small: If you are new to investing, it is a good idea to start small and gradually increase your investments over time.

Reasons for Choosing Equity Mutual Funds
There are a number of reasons why more and more Indian investors are choosing equity mutual funds as their investment tool.
These include:
∎  The long-term performance of equity mutual funds has been very good. Over the past 10 years, the average annual return of equity mutual funds has been around 12 per cent if an                 investor has remains invested for a long period.
∎  Equity mutual funds offer a diversified portfolio of investments, which helps to reduce risk.
∎  Equity mutual funds are relatively easy to invest in and manage.
∎  The Indian equity market is one of the most dynamic and growing markets in the world.
∎ The Indian economy is expected to grow at a healthy pace in the coming years.
∎  There are a number of attractive investment opportunities in the Indian equity market. n Equity mutual funds provide diversification, which helps to reduce risk.
∎  Equity mutual funds are managed by experienced professionals who have the knowledge and expertise to select the right stocks.
∎  Equity mutual funds are liquid, which means that investors can easily buy and sell their units.

Transition to Stocks for Long-Term Growth
There are various reasons why an increasing number of investors are choosing stocks for long-term growth:

1) Preference for Longer Investment Horizon
The AUM of the Indian MF industry has grown from Rs 8.11 lakh crore as on June 30, 2013 to Rs 44.39 lakh crore as on June 30, 2023, indicating more than a five-fold increase in a span of 10 years and at an astounding pace of CAGR of 18.5 per cent. One of the reasons for such high growth is the presence of young demography like India. The country has one of the world’s largest young populations with a median age in higher twenties. According to United Nations’ estimates, around 90 per cent of the Indians are still below the age of 60 and 63 per cent of them were between 15 and 59 years. A large and young population translates into a large workforce and higher investment horizon, which is a win-win for investors as well as the investment industry. 

Equities play a key role in global asset allocation. If we compare the asset allocation of India with the international investment landscape, we see that the global investment industry tends to have a greater role for equities. For instance, in the US, equities and alternatives (private equity, hedge funds and real estate) account for around 60 per cent of the investment pool. While much has happened in the investment landscape over the past 10 years, the industry has not even touched the tip of the iceberg based on the potential and comparison seen with developed countries.

2) Higher GDP Growth
Another important factor that is making equity as a preferred investment vehicle for the long term is the growth rate that the Indian economy is expected to experience over the next few years. India remained one of the fastest-growing major economies in the world with annual growth of around 6.7 per cent between calendar years 2014 and 2019 before the pandemic derailed growth in 2020. Nevertheless, post the pandemic, India has once again emerged as the fastest growing major economy. The IMF has also forecast that the country’s GDP will grow at a faster pace compared with other economies. India has increased its growth differential with the global economy. 

Strong GDP growth boosts household income and savings, which, in turn, shores up investments. Better economic growth and strong balance-sheets of corporates provide an opportunity to kick-start the private investment cycle in a broad-based manner that again augurs well for investors. Additionally, India can scale up the benefits from the rewiring of global supply chains by improving its investment attractiveness. All this spells a spurt in GDP growth, which gets built into market growth, supporting mark-to-market growth and accelerating asset growth.

3) Maturing Ecosystem
In recent years, an encouraging trend has emerged in the investment landscape with nearly 50 per cent of first-time investors being millennials. This significant shift can be attributed to various factors, including the impact of the pandemic, which acted as a wake-up call for financial preparedness amidst the subsequent market boom. However, what truly stands out is the maturation of the investment ecosystem, observed from three key perspectives. Firstly, distribution has improved substantially, providing abundant information on diverse investing opportunities and products, making it easier for millennial investors to access both online and offline investment platforms.

Secondly, financial products have grown more appealing due to their growth potential and enhanced regulatory oversight ensuring investor safety, all of which makes them increasingly compelling compared to other investment options. This leads to the realisation that there might be ‘no alternative’ (TINA) as attractive as these equity products. Thirdly, the AMFI has played a vital role in fostering this positive trend. Their ‘Mutual Fund Sahi Hai’ campaign, founded on deep insights into customers’ needs and desires, has been remarkably effective in promoting mutual fund investments among millennials. These collective factors have driven the surge in investment among millennials and the data reveals heartening statistics that indicate this trend is more than a fleeting blip but rather a robust and lasting effect.

4) Attractive Investment Option
As the Indian economy continues its growth trajectory, the demand for equity mutual funds is expected to further rise in the future. This is primarily because equity mutual funds have the potential to yield higher returns compared to conventional investment options like fixed deposits. Admittedly, investing in equity mutual funds carries inherent risks, including the possibility of capital loss and exposure to market volatility. 

Nevertheless, for most investors, the potential rewards offered by equity mutual funds outweigh these risks. In essence, equity mutual funds present an attractive investment option for Indian investors seeking long-term growth prospects. As such, investors can work towards achieving their financial objectives by exercising due diligence in selecting and diversifying their mutual fund portfolios.