Key mutual fund trends observed in December 2023

15 Jan 2024 , 11:31 AM

As of the close of December 2023, the average assets under management (AAUM) stood at Rs51.09 trillion; 4.8% higher than the AAUM at the close of November 2023. SIP flows in December 2023 touched a record Rs17,610 crore while the NFO (new fund offering) flows were relatively strong at Rs9,872 crore, dominated by sectoral funds, thematic funds, balanced allocation funds (BAF), and closed-ended Fixed Term Plans.

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 December 2023 pertain to overall AUM of mutual funds, the mix and colour of the AUM and the nature of investors. The AMFI report also provides value added analytics like ageing of equity fund investments and average holding period. In the last few months, investors have shown much greater awareness of and inclination towards asset allocation.

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

Mutual fund segment level trends for December 2023 are confined to a macro level and have more to do with the colour 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 Rs51.09 trillion as of the close of December 2023, sharply higher than the AAUM of Rs48.75 trillion as of the close of November 2023. That translates into dollar AUM of close to $612 billion. Compared to November 2023, the AUM growth in December was higher due to strong flows combined with the sharp capital appreciation in equity indices. On a yoy basis, the mutual fund AUM has grown by a healthy 25.34% compared to December 2022. That was largely due to inflows and in equal measure due to Nifty rally; which closed 2023 with annual gains of 20%.

   

• In the last couple of years, we have seen a gradual shift in the overall AUM mix from active debt to active equity. In December, active equity funds and passives gained market share, while active debt funds and liquid funds low share. This can be attributed to negative flows into debt funds and the sharp appreciation in equity funds, combined with robust inflows, which made the equity funds relatively heavier. As a result, active equity fund share was surged by 160 bps from 54.9% to 56.5% over November 2023 while it is up 490 bps on yoy basis. Passive fund share was up by 20 bps from 12.7% to 12.9% over November 2023 while it is down 40 bps on yoy basis. Active debt funds share was down by 100 bps from 18.5% to 17.5% over November 2023 while it is down 160 bps on yoy basis. Finally, let us turn to liquid / money market funds. The fund share was down by 90 bps from 14.0% to 13.1% over November 2023 while it is down 290 bps on yoy basis compared to December 2022.

   

• The interest in debt funds has not only got hit by the higher returns on equity funds in the last couple of years, but also the unfavourable tax treatment of debt funds as per the modifications done in the Union Budget 2023-24. A large part of the liquid fund flows is treasury flows in nature. However, these liquid funds are now facing stiff competition from arbitrage funds as an alternative to liquid funds. Equity market volatility has led to arbitrage funds yielding higher returns in a more tax efficient manner. In addition, the new taxation rules on debt funds are making liquid funds less attractive as pure debt funds are now being taxed at the peak rate even if held for the long term. Passive funds, comprising of index funds, equity index ETFs, debt index ETFs and fund of funds (FOFs) have seen their share shift marginally. This is the seventh month in a row that the market share of passive funds has been under 13%. 

   

• Are individual investors continuing to play a bigger role in mutual fund AUM as compared to institutional investors; which has been the perceptible trend in recent months? If you look at the AUM share, the answer is fairly unequivocal and this can be largely attributed to the surge in SIP flows. The massive influx of Gen-Z and millennial investors into mutual funds; combined with the rapid rise of SIPs, has resulted in a surge in retail folios and retail AUM in this period. In December 2023, gross SIP flows were at a record high of Rs17,610 crore; a classic barometer of retail appetite for equity funds. Between December 2022 and December 2023, the share of individual investors in the overall AUM composition has gone up by 230 basis points from 57.80% to 60.10%. Even on a MOM basis, the share of individuals in mutual fund AUM has increased by 90 bps; which is very strong. At the same time, the share of institutions and corporates in the overall mutual fund AUM has fallen over the last one year from 42.2% to 39.9%. In fact, this is the first time in the last 10 years that the share of retail has crossed 60% and the share of institutional has fallen below 40%.

   

• How much have individual investors allocated to each of the different categories of mutual funds like debt, equity, liquids, and ETFs? As of December 2023, individual investors have a share of just 40% in debt oriented schemes and 14% in short term money market schemes. These are treasury products where demand largely emanates from corporates and financial institutions. However, individual investors have an imposing 89% share of equity fund AUM. What is perplexing is that individuals have just 10% of passive fund AUM (index funds and ETFs). Retail investors are not leveraging passive products, the way corporate investors and institutional investors are doing.

   

• Let us turn to the individual investor allocation basket; meaning how much they have invested of their corpus in each asset class. As of December 2023, individual investors have 83% of their mutual fund assets in equity schemes and 12% in active debt funds. Liquid funds at 3% and ETFs at 2% are fairly insignificant. On the other hand, institutional investors and corporates have 28% of their corpus in liquid funds, 29% in ETFs / FOFs, 26% in longer period active debt funds and 16% in active equity funds. The shift to equity and passive funds by institutions is on index surge and arbitrage fund demand.

As of the close of December 2023, overall assets of mutual funds in India have grown by 25.34% yoy. Assets of individual investors in this period grew by 30.33% while the growth in assets of institutional investors stood at 18.51%. 

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

Folios are investor accounts unique to an AMC. While they don’t represent unique investors, folios are good barometer of retail appetite. They tell you which way the wind is blowing.

• There were total of 16.49 crore folios as of the close of December 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 few months. 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. These ratios have been static over last few months. HNIs also have significant 6.4% of folios in index funds.

   

• When we look at folios, the big story is the geometric growth in folios post the financial crisis. 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 December 2023, the number of mutual fund folios have jumped sharply from 3.95 crore to 16.49 crore. That is a jump of 317.47% in folios since the year 2014. The impact on financialization of savings becomes apparent when you consider that the folios have grown in the last 9 years at a CAGR (compounded annual growth rate) of 16.6%.

   

• There are two takeaways on folios and retail holding period. Firstly, average ticket size across the mutual fund spectrum stands at Rs2.98 lakhs, while that AUM of retail investors in equity funds has been static at Rs0.76 lakhs on an average. The average ticket size for equity oriented funds is at 1.73 lakhs while for debt oriented funds it is Rs15.72 lakhs. These numbers have been static for some time now. 

   

• Finally, for some surprises on the individual investors stickiness, when it comes to mutual fund holdings. The general axiom is that retail investors tend to be less patient about investments. However, the average folio holding data contradicts this theory. In fact, the retail investors do not take a myopic approach to equity funds. As per data of December 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 that retail investors are a lot stickier and a lot more committed to long term investing. This can be attributed to the experience of the COVID pandemic, when the patient investors who stuck on to their mutual fund investments, ended up laughing all the way to the bank.

In a sense, the surge in the individual investor share is linked to SIP flows, while the improved retail experience is linked to stickiness. It looks like the pieces are falling in place.

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

Most mutual fund distributors admit that chunk of incremental sales of mutual funds are coming from tier-2 and tier-3 cities. In these cities, there seems to be a lot of buy-in for the concept of systematically managed investing like SIPs. Today, semi-urban investors are looking beyond traditional asset classes like bank FDs, land, and gold; and mutual funds have emerged as a hot favourite. Of course, greater digital connectivity and massive outreach programs have also helped in a big way.

• The mutual fund market is divided into the T30 (top-30) cities and the B30 (cities beyond top-30). If you compare December 2023 over November 2023, total assets of T30 centres sharply higher by 4.57% at Rs42.01 trillion compared to Rs40.18 trillion last month. The total assets of B30 centres increased by 5.90% to Rs9.08 trillion in December 2023. The trend is not too clear since chunk of the AUM accretion for both categories of investors has come from index appreciation, although folios are growing at a faster clip in the B-30 cities.

   

• The B30 cities had a higher preference for equity assets as compared to the T30 cities in December 2023 at 83% compared to just 51%. However, this data needs to be read differently, since most of the corporates and large institutional treasuries are based out of the T-30 centres, which could skew the data.

   

• For a more granular picture of the T30 / B30 story, let us look at individual assets rather than total assets. Nearly 26.31% of Individual assets as of December 2023 are located in B30 cities and 73.69% 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 43-45% of the overall assets came through the Direct route, only 21% of the retail investors money came through the Direct route. HNIs are slightly better at 26%, but it is the institutional investors who are making the best use of the Direct route.

The December 2023 AMFI report suggests that mutual funds are becoming a natural choice for serious retail investors. In last 2 months, individual investors gained ground and equity as an asset class has also gained ground. But a silent undercurrent is the clear preference for passive funds for beta, focused funds for beta and hybrid funds for asset allocation.