Key mutual fund trends observed in August 2024

16 Sep 2024 , 01:42 PM

MUTUAL FUND BRIEFING FOR AUGUST 2024

The month of August 2024 saw the overall mutual fund AUM rise to ₹66.70 Trillion in August 2024; compared to ₹64.97 Trillion in July 2024, ₹61.16 Trillion in June 2024, and ₹58.91 Trillion in May 2024. After the massive sell-off in debt funds in June (which is par for the course at quarter ends), the month of July 2024 saw net inflows into debt funds to the tune of ₹1.20 Trillion, while debt fund net inflows were ₹45,169 Crore in August 2024. However, amidst the debt bounce, even equity funds and other categories continued to grow. Active equity funds saw monthly inflows of ₹38,239 Crore; compared to ₹37,113 Crore in July 2024, a record ₹40,608 Crore in June 2024, and ₹34,697 Crore in May 2024. In fact, the average equity fund flows of the last 4 months has been of the order of ₹37,664 Crore.

SIP flows in August 2024 touched a record ₹23,547 Crore. This is the fifth consecutive month that the mutual fund monthly gross SIP flows have been above ₹20,000 Crore. The month of August 2024 also saw 63.94 Lakh SIP folios added; compared to a record 72.62 Lakh fresh SIP accounts in July, 55.13 Lakh fresh SIP accounts in June 2024, and 49.74 Lakh fresh SIP accounts in May 2024. The NFO (new fund offering) flows were also robust at ₹13,815 Crore, dominated by Sector funds, thematic funds, multi-cap fund and flexi-cap funds. SIP folios in India are now inching closer to the 10 Crore mark.

SIP STOPPAGE RATIO TOOK A TURN FOR THE WORSE IN AUGUST 2024

While these are the actual numbers pertaining to mutual funds in India, there are some concerns for mutual funds on the SIP stoppage ratio. SIP stoppage ratio is the ratio of SIPs stopped to SIPs initiated. AMFI only publishes gross SIP numbers, but it is the net SIP that really matters. For that, the gross SIP flows have to be adjusted for SIP closures to get the net SIP flows. Lower the SIP stoppage ratio, higher the retention and higher the net SIP accretion. The SIP stoppage ratio (SIPs Discontinued / SIPs registered) which had spiked to 88.38% in May 2024 sobered to 58.68% in June and further to 51.40% in July 2024. However, August 2024 saw SIP stoppage ratio bouncing back to 57.14%.

Even the cumulative SIP stoppage ratio for the first 5 months of FY24 still remains fairly high at 60.12%; although this could be distorted due to the exceptionally high SIP closures in May 2024. We now gather insights from the AMFI monthly review report, which analyses diverse areas like mix of investors, retail spread, retail intensity, ageing of investors etc. The report for August 2024 presents interesting stories about the growth of mutual funds in India. These narratives pertain to overall AUM of mutual funds, the mix and colour of AUM accretion and the nature of investors. AMFI also provides value-added analytics like ageing of equity fund investments and average holding period.

KEY TRENDS IN MUTUAL FUNDS – SEGMENT LEVEL (AUGUST 2024)

Mutual fund segment level trends for August 2024 are confined to a macro level and have more to do with the colour and direction of the flows into specific fund classes.

• Average assets under management (AAUM) of all mutual fund schemes combined, stood at a fairly elevated level of ₹66.04 Trillion in August 2024; compared to ₹64.71 Trillion in July 2024, ₹61.33 Trillion in June 2024, ₹58.60 Trillion in May 2024, ₹ 57.01 Crore in April 2024. That translates into dollar AUM of nearly $800 Billion. In August 2024, the average AUM and the closing AUM were both sharply higher compared to June 2024. The accretion in equity AUM in August was triggered partially by index accretion and largely by flows across active debt funds, active equity funds, hybrid funds and passive funds. In June, the heavy debt fund redemptions were triggered by quarter-end treasury considerations. In the case of equity funds, hybrid funds, and passive funds; the growth in AAUM was a mix of flows and index accretion. On a yoy basis, the mutual fund AAUM as of August 2024 has grown by a healthy 40.69% compared to August 2023.

• In the last couple of years, we have seen a gradual shift in the overall AUM mix from active debt to active equity. If you compare August 2024 with July 2024, then active equity funds saw a marginal rise in AUM share while active debt funds saw a small fall. However, the market share of passive funds and hybrid funds was static. The net result was that, active equity fund share in August 2024 was up 20 bps from 59.9% to 60.1% over July 2024 while its share in overall AUM is 740 bps higher on yoy basis.

• Passive fund share was flat at 12.7% in August 2024 while it is also flat on yoy basis. Here, one must remember that passive funds include index-based equity products and also index-based debt products. The share of active debt funds was down 10 bps from 14.6% to 14.5% in August 2024 over July 2024 while it is down 470 bps on yoy basis. Finally, let us turn to liquid / money market funds. The share was flat at 12.8% in August 2024 compared to July 2024, while it is down 260 bps on yoy basis. The flat MOM of liquid funds AUM is on account of lack of quarter-end treasury activity by corporates.

• On a yoy basis, the liquid fund share has been volatile due to the strong influence of treasury flows on liquid funds. In the case of active longer term debt funds, the issue is the absence of a narrative on debt funds and the uncertainty about the direction of interest rates. Hopefully, once the Fed acts on rates and the bond yields stabilize, we could see greater clarity on the appetite for long term active debt funds in India.

• Are individual investors playing a bigger role in mutual fund AUM compared to institutions? In fact, there is a distinct shift. One reason could be that the surge in SIP flows and NFOs; both of which are predominantly retail equity fund products. SIP flows at ₹23,547 Crore and the NFO flows of ₹13,805 Crore, come largely from investors looking at mutual funds; both as a financial planning tool and a thematic play. The young market segment for mutual fund SIPs reflects India’s demographic dividends. Another factor is that, falling yields on debt funds is gravitating investors towards equity funds.

• In August 2024, gross SIP flows were at a record high of ₹23,547 Crore; a credible barometer of retail intensity of equity fund flows. Between August 2023 and August 2024, the share of individual investors in the overall MF AUM composition has gone up by 330 basis points from 57.8% to 61.1%. However, on MOM basis, the share of individuals in mutual fund AUM is up just about 10 bps from 61.0% to 61.1%; as institutional treasury flows abated in August. On the other hand, share of institutions and corporates in overall mutual fund AUM has fallen over the last one year from 42.2% to 38.9%. Retail share has held above 60% since December 2023.

• How much have individual investors allocated to various categories of mutual funds like debt, equity, liquids, and ETFs? These ratios have been fairly stable over time. As of August 2024, individual investors have a share of a mere 37% in debt oriented schemes and 12% in short term money market schemes; same as last month. These are treasury products with institutional appetite, so low retail share is logical. Individual investors have an imposing 88% market share of equity fund assets. However, individuals have just 10% of passive fund AUM (index funds and ETFs). This could also be attributed to the large share of debt index ETFs and predominance of corporates in passive products. Retail investors are yet to get sold on to passive products.

• What about the individual investor’s allocation basket. How much of their corpus has been spread across various asset classes? As of August 2024, individual investors have 87% of their mutual fund asset portfolio in active equity schemes and 9% in active debt funds. Liquid funds at 2% and ETFs at 2% are fairly insignificant. What about non-individual investors? Institutions and corporates have 29% of their corpus in liquid funds, 29% in ETFs / FOFs, 23% in longer active debt funds and 19% in active equity funds. The higher equity share over last month is largely due to price appreciation.

As of the close of August 2024, overall assets of mutual funds in India (AAUM) has grown by 40.70% yoy. Assets of individual investors in this period grew by 48.67% while the growth in assets of institutional investors was a relatively modest 29.77%.

KEY TRENDS IN MUTUAL FUNDS – FOLIOS AND TICKET SIZES (AUGUST 2024)

Folios are investor accounts unique to an AMC. Folios do not represent unique investors, but are a good barometer of retail intensity.

• There were total of 20.45 Crore folios as of the close of August 2024 of which retail investors accounted for nearly 91.4% of the total folios. In addition, HNIs accounted for 8.0% of the folios while institutions accounted for the balance 0.6% of the total folios. These ratios have also been stable over last few quarters. However, the retail share of folios comes down sharply when we look at active debt funds. Here, retail investors account for just 68.7% of the folios, while HNI investors account for 29.0%. HNIs also have a high share of folios of liquid funds (20.1%) and hybrid funds (24.0%). In fact, Hybrids are structured for HNIs, with their complex asset allocation mix and their favourable tax treatment for individuals.

• Here is a longer term perspective. Between March 2009 and September 2014, mutual fund folios contracted from 4.76 Crore to 3.95 Crore due to persistent outflows from equity funds. However, between September 2014 and August 2024, the number of mutual fund folios have jumped from 3.95 Crore to 20.45 Crore. That is a jump of 417.7% in folios since the year 2014. The financialization of savings is clear when you see folios have grown at CAGR (compounded annual growth rate) of 18.03% since Sep-2014.

• There are two takeaways on folios and retail holding period. Let us look at average ticket size for equity and debt products. For equity funds (predominantly a retail product), the average ticket size stands at ₹2.08 Lakhs, which is nearly 20% higher on a yoy basis. In the case of debt funds, the average ticket size is at ₹17.28 Lakhs, which is about 10% higher on a yoy basis. The net AUM of Indian mutual funds at ₹66.70 Trillion is spread across 20.45 Crore folios, giving a per folio ticket size of ₹3.26 Lakhs.

• There is a general presumption that retail investors tend to be less patient about investments. However, that may be a myth and not borne out by actual data. If you look at the numbers, it paints a different picture of retail stickiness. Unlike the popular perception, retail investors do not adopt a myopic approach to equity funds. As per data for August 2024, retail investors hold 54.7% of equity fund assets for more than 2 years (sharply higher over last year). This ratio was just 43.7% in 2022. Interestingly, while 54.7% of the equity assets have been held for more than 24 months, the share of patient investing is much higher at 59.1% in the case of retail investors.

The surge in the individual investor share is linked to SIP flows and NFO flows, while the stickiness is on account of the lessons learnt post the pandemic. One thing that the pandemic underlined is that time matters a lot more than timing in the market. During the pandemic, it was only those investors who persisted with their SIPs who ended up making a big pile when the markets rebounded vertically after the sell-off. Rupee cost averaging is all about volatile markets; as bulls offer more value but it is the bears that offer more units.

KEY TRENDS IN MUTUAL FUNDS – GEOGRAPHICAL MIX (AUGUST 2024)

How are cities and towns contributing to the mutual fund growth story?

• The mutual fund market is divided into T30 (top-30) cities and B30 (cities beyond top-30). If you compare August 2024 with July 2024, total T30 assets are higher by 1.78% at ₹53.88 Trillion. Total assets of B30 centres increased by 3.35% to ₹12.16 Trillion in August 2024. To remove the overall institutional impact, we only look at the share of individuals. In August 2024, the B30 cities accounted for 26.87% of individual assets an increase of 11 bps compared to the previous month of July 2024. This also meant that the share of individuals in the top-tier T-30 cities fell from 73.24% to 73.13%.

• SEBI banned entry loads in 2009 and introduced Direct schemes in 2013. However, while 46% of the overall assets came through the Direct route, only 24% of the retail investors money came through the Direct route. HNIs are slightly better at 27%. Clearly, retail investors are not making the most of the facility of direct investing available to them.

In the last few months, the AMFI monthly trend report has shown a shift of retail assets from beta assets to alpha assets as markets scaled new highs. In the last couple of months, the interest levels in beta assets is coming back gradually. Nevertheless, it looks like the intense retail participation in equities in general and equity mutual funds in particular is here to stay for a fairly long time!