Key mutual fund trends observed in August 2023

16 Sep 2023 , 08:28 AM

If the overall mutual fund AUM crossed the Rs. 46 trillion mark for the first time in July 2023, then August 2023 saw these gains consolidating as the mutual fund industry closed August 2023 with combined average AUM of Rs. 46.94 trillion. SIP flows in July 2023 crossed the Rubicon of Rs15,000 crore and in August they consolidated further to Rs15,814 crore. August 2023 was also a strong month in terms of NFO (new fund offering) flows at over Rs7,000 crore, with equity fund flows accounting for more than 70% of such NFO flows. 

As is the general practice, the Association of Mutual Funds of India (AMFI) has just released its monthly report on the key trends in mutual funds based on industry level data. These trends for August 2023 pertain to overall AUM of mutual funds, the mix and color of the AUM and also the mix of the nature of investors. Apart from a geographical analysis of mutual fund investors, the AMFI report also provides value added analytics like ageing of equity fund investments and average holding period. Here are some major trends observed in mutual fund data for the month of August 2023.

Key Trends in Mutual Funds – Segment level (August 2023)

Mutual fund segment level trends for August 2023 are confined to a macro level and have more to do with the color and direction of the flows into different fund classes.

• Average assets under management (AAUM) of all mutual fund schemes combined, touched a life-time high of Rs46.94 trillion as of the close of August 2023. That translates into dollar AUM of $565 billion. Compared to July 2023, the AUM growth has been strong but dollar AUM growth has been tepid on account of weakening rupee. On a yoy basis, the mutual fund AUM has grown by 18.75% compared to August 2022. That was partially due to inflows and partially due to the Nifty rally.

   

• In the last couple of years, we have seen a gradual shift in the overall AUM mix from active debt to active equity, although that trend was questioned to some extent in the last few months. However, debt fund outflows and strong equity fund inflows in August 2023, have again underscored the equity fund domination. That is why, the share of active debt funds fell from 19.8% to 19.2% YOY, while it fell by 20 bps MOM. Between August 2022 and August 2023, the market share of equity oriented funds (including aggressive equity balanced) has gone up from 50.9% to 52.7% of the overall AUM mix. 

   

• Over the last 1 year, the share of liquid funds in the overall AUM has fallen from 16.8% to 15.4%. The share is also down 30 bps on a MOM basis. While a large part of the liquid fund flows is treasury flows in nature, there is a quiet underlying trend, which is the bounce in demand for arbitrage funds as an alternative for liquid funds. Amidst the equity market volatility, the arbitrage funds are yielding higher returns in a more tax efficient manner. Passive funds, comprising of index funds, equity index ETFs, debt index ETFs and fund of funds (FOFs) have increased over the last one year from 12.5% to 12.7%. In the last couple of months, the share of passives has fallen below the 13% share mark, but that is more due to a sharp rally in the stock markets.

   

• Are individual investors playing a bigger role in mutual fund investments as compared to institutional investors? If you look at the AUM share, the answer is an emphatic “Yes.” The entry of Gen-Z and millennial investors into mutual funds in general and SIPs in particular, led to a surge in the number of SIPs, which has substantially boosted individual participation in mutual funds. In August 2023, gross SIP flows were at an all-time record of Rs15,814 crore. Between August 2022 and August 2023, the share of individuals in the overall AUM composition has gone up from 56.6% to 57.8%. Even on a MOM basis, the share of individuals in mutual fund AUM has increased by 30 bps. Correspondingly, the share of institutions and corporates in the overall mutual fund AUM has fallen from 43.4% to 42.2%. It is largely an equity valuation story.

   

• How much have individual investors allocated to each of the different categories of mutual funds like debt, equity, liquids, and ETFs? As of August 2023, individual investors have a share of just 41% in debt oriented schemes and 12% in short term money market schemes. These are largely treasury products, so that is understandable. However, individual investors have an imposing 89% share of equity fund AUM, but just about 10% of AUM. Retail investors are not leveraging passive products, but it must be said that the overall individual investor shares have remained constant in the last one year.

   

• Let us turn to the individual investor allocation basket. As of August 2023, individual investors have 81% of their mutual fund assets in equity schemes and 14% in active debt funds. Liquid funds at 3% and ETFs at 2% are fairly insignificant. On the other hand, institutional investors and corporates have 32% of their corpus in liquid funds, 27% in ETFs / FOFs, 27% in long period debt funds and 14% in active equity funds. The shift to equity funds by institutions is largely on the back of demand for arbitrage products.

As of the close of August 2023, overall assets of mutual funds in India have grown by 18.72% yoy. Assets of individual investors in this period grew by 21.4% while the assets of institutional investors grew by a less impressive 15.25%. However, this is more due to the predominance of individual investors in equity funds.

Key trends in mutual funds – Folios and Ticket sizes (August 2023)

Folios are investor accounts unique to an AMC. They are a good proxy for retail appetite despite the fact that they are not exactly unique. Despite duplications, folios tell you which way the wind is blowing.

• There were total of 15.42 crore folios as of the close of August 2023 of which retail investors accounted for nearly 91.2% of the total folios. In addition, HNIs accounted for 8.2% of the folios while institutions accounted for the balance 0.6% of the total folios. These ratios have been static over last month. However, the retail share of folios comes down drastically when we look at active debt funds. Here, retail investors account for just 66.5% of the folios, while HNI investors account for 31.1% of the folios. HNIs also have a high share of folios of liquid funds (20.1%) and hybrid funds (22.6%); which are targeted principally at the savvy HNI investors.

   

• When we look at folios, the big story is the geometric growth in folios since the global financial crisis of 2008-09. Post the financial crisis, there was a 5 year phase when the folios compressed due to lacklustre interest post the financial crisis. For instance, between March 2009 and September 2014, the number of mutual fund folios had actually contracted from 4.76 crore to 3.95 crore. However, between September 2014 and August 2023, the number of mutual fund folios have jumped sharply from 3.95 crore to 15.42 crore. That is a jump of 290% in folios since the year 2014; hinting at substantial financialization of savings as well as the democratization of equity markets.

   

• There are two takeaways on folios and retail holding period. Firstly, average ticket size of retail investors in equity funds has been static MOM at Rs0.76 lakhs. But there is one more interesting takeaway, which beats popular logic. The folio holding data contradicts the general belief that retail investors tend to take a myopic approach to equity funds. As per data of August 2023, retail investors hold nearly 51.4% of the equity fund assets for more than 2 years. This is up from just 43.7% in 2022. It clearly shows a lot more stickiness among retail investors and could be induced by the experience of the pandemic, when the investors who stuck on to SIPs ended up laughing all the way to the bank.

The good news is that retail investors are realizing the virtues of time over timing in the market. As a result, retail investors are becoming more patient with equity funds and taking wealth creation and financial planning more seriously. They are not panicking in times of volatility and the lessons of the pandemic have been crystal clear. Long term wealth creation is for the investors who let compounding happen. 

Key trends in mutual funds – Geographical mix (August 2023)

Mutual fund marketers confess that much of incremental sales of mutual funds are coming from tier-2 and tier-3 cities. Today, semi-urban investors are looking beyond traditional asset classes like bank FDs, land, and gold. Greater digital connectivity is one reason, but small town investors are also increasingly the need to diversify their holdings.

• The mutual fund market is divided into the T30 (top-30) cities and the B30 (cities beyond top-30). If you compare August 2023 over July 2023, total assets of T30 centres increased by just 1.12% to Rs38.84 trillion while the total assets of B30 centers increased by 2.92% to Rs8.10 trillion. Clearly, the AUM growth has been captured by the B-30 cities in August 2023. Around 17% of the AUM comes from B-30 locations.

   

• The B30 cities had a higher preference for equity assets as compared to the T30 cities in August 2023 at 80% compared to just 46%. However, this data cannot be taken at face value since the T30 cities are where most institutional treasuries are located. 

   

• For a more granular picture of the T30 / B30 story, let us look at individual assets rather than total assets. Nearly 26% of Individual assets as of August 2023 are located in B30 cities and 74% in T30 cities. Clearly, B30 cities are fast emerging as key players.

   

• SEBI had banned entry loads in 2009 and introduced Direct schemes in 2013. However, while 46% of the overall assets came through the Direct route, only 21% of the retail investors money has come through the Direct route. HNIs are slightly better at 26%, but it looks like corporates and institutions are real beneficiaries of the direct route.

To sum it up, the August data released by AMFI suggests that mutual funds are becoming the default option for serious investors interested in financial planning and long term wealth creation. This is spreading much faster than expected to smaller towns and, that too, at a rapid pace. This financialization of household savings, is a good trend for Indian markets.