How the Indian mutual fund industry changed in 2021

19 Jan 2022 , 05:19 PM

Year 2021 has been an interesting year for mutual funds. Even as SIPs and equity fund flows touched record levels, there were a host of other subtle shifts and trends visible in 2021. At a macro level, the overall assets under management (AUM) of the Indian mutual fund segment has grown from Rs30.96 trillion to Rs37.92 trillion in 2021. That is an accretion of 22.46% in the year with most of this accretion coming from equity funds, boosted by a robust Nifty performance.

How did the scheme-wise composition of MFs change in 2021

For a long time, debt funds dominated the overall MF AUM. If you add up debt funds and liquid funds, they are not the largest as of the end of 2021.

Mutual Fund Category	Share of AUM — Dec-20	Share of AUM — Dec-21	Change in share
Liquid / Money Funds	17.7%	15.3%	-2.4%
Debt oriented funds	33.2%	25.4%	-7.8%
Equity oriented funds	40.4%	48.2%	7.8%
ETFs and FOFs	8.7%	11.0%	2.3%

Data Source: AMFI

As can be seen in the above table, equity funds have gained heavily in this year as low yields and a robust equity market resulted in a big shift out of debt and into equity. Let us consider debt and liquid funds jointly as a single category. At the start of 2021, debt and liquid funds jointly had a share of 50.9% of MF AUM while equity funds were 40.4%. By the end of 2021, the tables changed completely. Debt and liquid funds now account for 40.7% of AUM while equity funds account for a whopping 48.2% of AUM.

How the mix of individuals and institutions changed in 2021

With over 11 crore folios in mutual funds and nearly 5 crore SIP folios, retail investors have been playing a consistently bigger part in the overall mutual fund AUM. At the start of 2021, institutions accounted for 47.8% of the AUM and individuals accounted for 52.2% of the AUM. By the end of 2021, institutions account for just 45% of the AUM while individuals account for 55% of the AUM. The share gap between individuals and institutions has widened from just 4.4% at the start of the year to 10% by the end of the year.

This trend would get accentuated if the current momentum of SIPs continue. If bond yields go up, as is likely from the hawkish noises made by the Fed, institutions may be more wary of debt funds at the longer end.

Individuals are still playing the active equity game aggressively

Let us look at the break up of individual and institutional investors under different categories of mutual funds. Institutions account for 87% of the liquid fund AUM and 63% of the debt fund AUM. That is hardly surprising as institutions use liquid funds and debt funds for treasury management. However, the good news is that individuals have increased their share of debt fund allocations, hinting at a financial planning approach.

Individuals account for 88% of the AUM of equity funds. That is not too surprising as is evident from the surge in SIPs and retail flows. What needs to improve is that individuals are just about 11% of ETFs and FOFs. These passive investments are extremely popular in other countries and individual investors must look at such passive instruments as a distinct allocation. However, retail participation has been growing in this space recently.

If you look at the aggregate portfolio of individual investors in mutual funds, 77% is accounted for by active equity funds. While debt funds are 17% and liquid funds are 4%, passive ETFs are just about 2% of individual MF portfolios.

Individual investors are geographically spread, but wary of direct investing

As of Dec-21, the T-30 (top-30) cities accounted for 57% of individual AUM in mutual funds. The T-30 itself is not a kind of metro list because the 30th city in the list is Aurangabad. However, what is gratifying is that 43% of individual MF assets are already located in smaller B-30 towns. That shows that the B-30 incentives for distributors are really working.

Direct investing (no distributor commission) can reduce costs to individual investors. However, only 21% of overall assets of individuals came through the direct route and the balance is through the regular route. Investors in B-30 towns, still prefer the distributor route to invest in mutual funds. It is a mix of convenience and comfort that makes regular funds more popular in B-30 cities, where more than 90% of the individual investors still prefer the distributor route.

Finally, individual investors are staying put for the long term

Indian Mutual Funds have over 11.2 crore folios of which 90% is accounted for by retail individual investors. One concern has been that retail investors look for short term gratification in mutual funds, especially equity funds. But is that really the case?

The reality is that individuals are actually adopting a long term approach to equity funds. Nearly 42.1% of the equity assets have been held for more than 2 years and over 60% of the assets have been held for more than 1 year. The good news is that individual investors in equity funds are not looking for instant gratification. That is a happy note to end 2021.