How has the Mutual Fund One Trillion Club grown in 3 years?

26 Sep 2023 , 10:49 AM

These are indicative of the categories of funds where most of the flows and AUM is gravitating. Consider these numbers. There are a total of 39 mutual fund categories under various heads like debt, equity, hybrid, solutions, and passive. Out of these 39 categories of funds available in India, there are 19 categories of fund that belong to the One Trillion Club i.e., having AUM of more than Rs1 lakh crore. These 19 funds account for 83.77% of the total AUM of mutual funds in India, which his why they are a significant category.

The story post COVID pandemic

In a sense, the post pandemic period was a watershed moment for the mutual fund segment in India. Money poured into systematic investment plans (SIP) and new fund offerings (NFOs). In the process, the overall AUM of Indian mutual funds has gone up in the last 3 years from a little over Rs27 trillion to well over Rs46 trillion. Obviously, this growth has not been uniform, but there are three trends that have emerged in the post pandemic era. The first trend is that investors are getting weary of debt funds that chase alpha. You invest in debt for stability and if debt cannot provide stability, it defeats the purpose. 

Secondly, on equity and debt front, there is greater preference for passive funds. As John Bogle of Vanguard put it famously, “Why look for a needle in the haystack, when you can buy the entire haystack.” Thirdly, there is an appetite for risk too, but investors want a genuine plan and methodology for this risk. In the post-pandemic scenario, funds and fund categories are being bought and not sold. The fund categories with the best narrative and the best performance to boot are seeing flows gravitating towards them.

Painting the AUM story of the One Trillion Club

Let us start with a macro picture of how the AUM story of the One Trillion Club is manifesting. Of course, here we are referring to the mutual fund categories with more than Rs1 lakh crore in AUM as of August 2023. Check out the table below.

Mutual Fund Category	Aug-23	Aug-22	Aug-21	Aug-20
Index ETFs (equity and debt)	5,46,424	4,59,208	3,44,292	2,06,680
Liquid Funds	4,50,017	4,11,292	3,71,246	4,27,392
Flexi Cap Funds	2,83,765	2,42,438	2,07,661	1,46,532
Large Cap Funds	2,62,299	2,40,308	2,12,473	1,48,723
Mid Cap Funds	2,39,462	1,78,094	1,46,627	88,734
Sector / Thematic Funds	2,12,651	1,57,812	1,31,122	66,100
Dynamic Allocation Funds (BAF)	2,09,563	1,92,369	1,41,493	89,472
Small Cap Funds	1,94,020	1,20,464	93,677	52,119
Index Funds	1,80,750	1,04,742	30,051	12,322
ELSS Funds	1,76,214	1,53,508	1,45,951	98,701
Aggressive Hybrid Funds	1,71,833	1,55,900	1,40,797	1,15,297
Large & Mid Cap	1,59,363	1,22,862	96,660	57,786
Money Market Fund	1,50,534	1,18,232	1,25,210	84,453
Corporate Bond Fund	1,39,506	1,15,412	1,61,378	1,19,252
Value / Contra Funds	1,12,731	85,682	73,613	53,137
Focused Funds	1,11,637	1,04,348	89,404	53,098
Low Duration Funds	1,06,822	1,02,932	1,56,107	1,10,015
Short Duration Funds	99,453	98,863	1,42,038	1,17,348
Arbitrage Funds	98,939	81,385	1,08,251	66,002

Data Source: AMFI (all figures are Rs in crore)

To be fair, we have also considered a couple of funds that are marginally below the threshold of the One Trillion Club, so that the key trends are not missed out. The list is dominated by the active equity funds with 9 out of the 19 funds in the One Trillion Club being active equity funds. One can argue that this growth in AUM has been helped by the market rally. That is true to some extent, but one cannot deny that flows have been robust too. Multi-cap funds are not in the list any longer, but that is because most of them converted to flexi-cap funds category post 2020, when the new segment was introduced. Hence, we have used multi-cap fund AUM as the base for calculating the CAGR growth in AUM for flexi-cap funds. That may not be a precise measure; but better to be approximately right than precisely wrong. But the real story of the One Trillion Club is not in the  AUM but in AUM growth, and we will look at that in terms of 3-year CAGR.

One Trillion Club – How AUM evolved in 3 years

This is the more interesting side of the story. Annual changes in the AUM can be misleading and often subject to temporary cycles. To get a more secular picture, we look at how the AUM of this One Trillion Club evolved over the 3 years since the pandemic came to an end. We compare August 2023 with August 2021 and focus on the funds that are in the One Trillion Club as of the end of August 2023.

Mutual Fund Category	Aug-23	Aug-22	Aug-21	Aug-20	CAGR (%)
Index Funds	1,80,750	1,04,742	30,051	12,322	144.79%
Small Cap Funds	1,94,020	1,20,464	93,677	52,119	54.98%
Sector / Thematic Funds	2,12,651	1,57,812	1,31,122	66,100	47.62%
Large & Mid Cap	1,59,363	1,22,862	96,660	57,786	40.23%
Mid Cap Funds	2,39,462	1,78,094	1,46,627	88,734	39.22%
Index ETFs (equity and debt)	5,46,424	4,59,208	3,44,292	2,06,680	38.28%
Dynamic Allocation Funds (BAF)	2,09,563	1,92,369	1,41,493	89,472	32.80%
Value / Contra Funds	1,12,731	85,682	73,613	53,137	28.49%
Focused Funds	1,11,637	1,04,348	89,404	53,098	28.11%
Flexi Cap Funds	2,83,765	2,42,438	2,07,661	1,46,532	24.65%
ELSS Funds	1,76,214	1,53,508	1,45,951	98,701	21.31%
Money Market Fund	1,50,534	1,18,232	1,25,210	84,453	21.25%
Large Cap Funds	2,62,299	2,40,308	2,12,473	1,48,723	20.82%
Arbitrage Funds	98,939	81,385	1,08,251	66,002	14.45%
Aggressive Hybrid Funds	1,71,833	1,55,900	1,40,797	1,15,297	14.23%
Corporate Bond Fund	1,39,506	1,15,412	1,61,378	1,19,252	5.37%
Liquid Funds	4,50,017	4,11,292	3,71,246	4,27,392	1.73%
Low Duration Funds	1,06,822	1,02,932	1,56,107	1,10,015	-0.98%
Short Duration Funds	99,453	98,863	1,42,038	1,17,348	-5.37%

Data Source: AMFI (all figures are Rs in crore, except CAGR)

We outlined some broad trends at the start and we will delve into these trends deeper and also back up with actual data as shown in the table above.

• Let us start with the fund that were in the One Trillion AUM club in August 2020 and August 2021, but are not there in the list as of August 2023. Multi-cap funds are out for a different reason, which we explained earlier. Other fund categories that vanished from the club include Banking & PSU funds, ultra short duration funds, and overnight funds. The last one is a treasury product and bound to be volatile. However, the banking & PSU funds and the ultra-short duration funds actually saw a fall in AUM as they were too aggressive at times and that showed up on performance. Let us now turn to the growth stories in the One Trillion Club.

   

• The first big growth narrative post-pandemic was the passive funds. For instance, the index funds saw the best CAGR growth of 144.79% over the last 3 years, albeit on a smaller base. At the same time, the CAGR growth of index ETFs (both debt and equity) also grew by an impressive at an impressive 38.28%. Today, the index ETF category has emerged as the biggest AUM category at Rs5.46 trillion. The shift to passive funds in the last 3 years has been prominent as scores of active funds managers have struggled to beat the index and passive offered a low cost alternative.

   

• The second big growth narrative in the last 3 years were the alpha chasing equity funds. Clearly, investors want equity fund managers to chase alpha, while they don’t expect the debt fund manages to chase alpha. Small cap funds saw the best CAGR growth at 54.98%; followed by sector funds at 47.62%, large & mid cap funds at 40.23% and mid-cap funds at 39.22%. In the Indian markets, the smaller stocks have traditionally outperformed the larger stocks due to offering more opportunities, lower base, lower debt, and more focused business models. There is a distinct market for risk products, provided they can deliver alpha over the longer run.

   

• Even in the equity fund category, certain classes funds have lagged in terms of CAGR growth over the last 3 years. ELSS funds grew at just 21.31% and large cap funds at just 20.82%. They were bottom of the heap and remember, this growth comes amidst markets. That means, the sentiments have actually been unfavourable. Large caps funds are understandable as investors see a better low cost alternative in passive funds like index funds and index ETFs. In the case of ELSS funds, many investors are discovering that the returns, despite the mandatory lock-in, are not too much better than a typical large cap fund. Also, with rising income levels, and the new tax regime, the ELSS as a product would only have limited significance for investors.

   

• What were the laggards in the debt funds category. In the first point we looked at some categories of debt funds like banking & PSU funds and ultra short term, where the AUM has actually fallen below the One Trillion threshold. Among the active debt funds, short duration and low duration funds saw negative CAGR in the last 3 years largely on account of undue risks taken by some funds in this category. Other laggards in the debt fund category were corporate funds, which had triggered a lot of investor caution post the Templeton crisis in April 2020.

If you look back at the 3 years growth of AUM of the One Trillion Club, there is a certain method the madness. The broad narrative is that investor sentiments appear favourable towards passive funds and aggressive equity funds; but neutral to negative towards large cap active funds and aggressive debt funds. Even among the growth stories over a 3 year period, there are some specific stories like flexi cap funds and Dynamic allocation funds (BAFs) where the momentum has not been too robust in the latest year. But that would make a story for another time!