Key mutual fund trends observed in February 2024

18 Mar 2024 , 07:32 AM

As of the close of February 2024, the average assets under management (AAUM) stood at ₹54.52 Trillion. SIP flows in February 2024 touched a record ₹19,187 Crore while the NFO (new fund offering) flows were relatively strong at ₹11,720 Crore, dominated by active equity funds and active debt funds. Hybrid fund flows were flat, while passive fund flows improved in the month of February 2024. But the biggest cause of celebration was the SIP folios touching 8.20 Crore and SIP AUM at ₹10.53 Trillion as of end February 2024.

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 February 2024 are across various categories. They pertain to overall AUM of mutual funds, the mix and colour of AUM accretion and the nature of investors. In addition, the AMFI report also provides value added analytics like ageing of equity fund investments and average holding period. The report also underlines some key trends like shift to passives, shift to specific categories of funds etc.

Key Trends in Mutual Funds – Segment level (February 2024)

Mutual fund segment level trends for February 2024 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 ₹54.52 Trillion as of the close of February 2024, sharply higher than the AAUM of ₹52.89 Trillion as of the close of January 2024, ₹51.09 Trillion as of the close of December 2023, and ₹48.75 Trillion as of the close of November 2024. That translates into dollar AUM of $660 Billion. The AUM accretion in February 2024 was a mix of index appreciation and fresh flows; with the fresh flows most prominent across active equity and active debt funds. On a yoy basis, the mutual fund AAUM has grown by a healthy 33.99% compared to February 2023. The frenetic bull rally of the last one year has also contributed to this accretion in AAUM.
• In the last couple of years, we have seen a gradual shift in the overall AUM mix from active debt to active equity. In February 2024, active equity funds gained AUM share and liquid funds had flat share over January 2024. However, active debt funds and passive funds lost share. This can be attributed to the sharp appreciation in equity funds, combined with robust inflows, which made the equity funds relatively heavier. This even offset the robust flows into debt funds in February 2024, which sustained for the second month in a row. As a result, active equity fund share surged by 50 bps from 56.9% to 57.4% over January 2024 while it is up 610 bps on yoy basis. Passive fund share was down by 10 bps from 12.8% to 12.7% over January 2024 while it is down 50 bps on yoy basis. Active debt funds share was down by 50 bps from 17.0% to 16.5% over January 2024 while it is down 270 bps on yoy basis. Finally, let us turn to liquid / money market funds. The share was up by flat MOM at 13.4% compared to January 2024, while it is down 290 bps on yoy basis compared to February 2023.
• The share of debt fund AUM was not only hit by higher returns on equity funds in last couple of years, but also the unfavourable tax treatment of debt funds as per the modifications done in Union Budget 2023-24. Now, funds with less than 35% of exposure to equity will be treated at par with fixed deposits. That means; even if they are held for more than 3 years, they would still be taxed at the peak applicable rate and the benefit of indexation of capital gains stands withdrawn. A chunk of liquid fund flows is treasury flows, which explains why the share of liquid funds is flat MOM while the share of debt funds is down. One trigger for debt fund flows could be if RBI cuts rates, but that looks unlikely to happen till the time the elections are over, a new government is in place and the full budget is presented by the new government. Equity market volatility has resulted in elevated interest in arbitrage funds. Passive funds, comprising of index funds, equity index ETFs, debt index ETFs and fund of funds (FOFs) saw market share trim marginally. This is the seventh month in a row that market share of passive funds has been under 13%, and the preference is clearly towards alpha.
• Are individual investors playing a bigger role in mutual fund AUM as compared to institutional investors; a 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, especially from the Gen-Z and millennial investors into mutual funds. In February 2024, gross SIP flows were at a record high of ₹19,187 Crore; a classic barometer of retail appetite for equity funds. Between February 2023 and February 2024, the share of individual investors in the overall AUM composition has gone up by 270 basis points from 57.60% to 60.30%. However, on MOM basis, the share of individuals in mutual fund AUM has gone up by 20 bps from 60.1% to 60.3%; which is despite the strong debt market flows in February 2024. At the same time, the share of institutions and corporates in the overall mutual fund AUM has fallen over the last one year from 42.4% to 39.7%. It was only in December 2023, that the share of retail crossed 60% and the share of institutional had fallen below 40%.
• How much have individual investors allocated to each of the various categories of mutual funds like debt, equity, liquids, and ETFs? As of February 2024, individual investors have a share of just 40% in debt oriented schemes and 13% in short term money market schemes. These are treasury products where demand largely is generated by the corporates and financial institutions. Individual investors have an imposing 88% share of equity fund AUM. Surprisingly, 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 various asset classes. As of February 2024, individual investors have 84% of their mutual fund assets in equity schemes and 11% in active debt funds. Liquid funds at 3% and ETFs at 2% are fairly insignificant. On the other hand, institutional investors and corporates have 29% of their corpus in liquid funds, 29% in ETFs / FOFs, 26% in longer period active debt funds and 16% in active equity funds. These ratios have been stable over the last few months.

As of the close of February 2024, overall assets of mutual funds in India have grown by 34.01% yoy. Assets of individual investors in this period grew by 40.24% while the growth in assets of institutional investors stood at a more subdued 25.54%.

Key trends in mutual funds – Folios and Ticket sizes (February 2024)

Folios are investor accounts unique to an AMC. While they don’t represent unique investors, folios are good barometer of retail intensity. They tell you the retail story a lot better.

• There were total of 17.42 Crore folios as of the close of February 2024 of which retail investors accounted for nearly 91.3% of the total folios. In addition, HNIs accounted for 8.0% of the folios while institutions accounted for the balance 0.7% of the total folios. These ratios have also 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 68.5% of the folios, while HNI investors account for 29.1% of the folios. HNIs also have a high share of folios of liquid funds (19.9%) and hybrid funds (23.6%); which are targeted principally at the savvy HNI investors. HNIs also have 5.1% of folios in index funds. Many HNI investors have shown a preference for hybrid schemes over debt schemes in search of that elusive alpha.
• Here is a slightly longer perspective. Between March 2009 and September 2014, the number of mutual fund folios contracted from 4.76 Crore to 3.95 Crore. However, between September 2014 and February 2024, the number of mutual fund folios have jumped sharply from 3.95 Crore to 17.42 Crore. That is a jump of 341.01% in folios since the year 2014. The financialization of savings becomes apparent when you consider that folios have grown in last 9 years at a CAGR (compounded annual growth rate) of 16.8%.
• There are two takeaways on folios and retail holding period. Firstly, average ticket size is sharply up at ₹3.08 Lakhs from ₹2.76 Lakhs last year. The average ticket size for equity oriented funds is at ₹1.93 Lakhs while for debt oriented funds it is ₹15.77 Lakhs. One interesting trend is that the average account size of the retail investors has also gone up from ₹0.72 Lakhs last year to ₹0.85 Lakhs this year.
• The general presumption is that retail investors tend to be less patient about investments. However, the average folio holding tenure contradicts this theory. Retail investors do not adopt a myopic approach to equity funds. As per data of February 2024, retail investors hold nearly 53.1% of the equity fund assets for more than 2 years. This is up from 43.7% in 2022. Nearly 72% of the equity AUM of individuals is held for at least 1 year.

In a sense, the surge in the individual investor share is linked to SIP flows, while the stickiness has more to do with the lessons learnt by investors during the COVID phase.

Key trends in mutual funds – Geographical mix (February 2024)

Any mutual fund agent or distributor would intuitively tell you that there is a lot of traction for mutual funds in the semi-urban pockets. In fact, much of the incremental demand is coming from outside the large metros. This shift is largely being driven by SIP flows. The real mutual fund action is in tier-2 and tier-3 cities. Most small-town investors were traditionally exposed to gold and realty and are now looking at a bigger chunk of financial assets.

• The mutual fund market is divided into T30 (top-30) cities and B30 (cities beyond top-30). If you compare February 2024 with January 2024, total T30 assets are higher by 3.02% at ₹44.81 Trillion. Total assets of B30 centres increased by 3.43% to ₹9.71 Trillion in February 2024. The trend is ambiguous since most of the AUM accretion for both categories came from index appreciation, but folios are growing faster in B-30 cities.
• The B30 cities had a higher preference for equity assets as compared to the T30 cities in February 2024 at 84% compared to just 52%. However, this data has a different sense, since most of the corporates and large institutional treasuries are based out of the T-30 centres, which skews the data. This makes the debt mix skewed towards the large cities, where most of the institutions, banks and corporates are located.
• For a more granular picture of the T30 / B30 story, let us look at individual assets rather than total assets. Nearly 26.41% of Individual assets as of February 2024 are located in B30 cities and 73.59% in T30 cities. Clearly, B30 cities are emerging as key players and are already more than a quarter of the sizable Indian mutual fund market.
• SEBI banned entry loads in 2009 and introduced Direct schemes in 2013. However, while 43% of the overall assets came through the Direct route, only 23% of the retail investors money came through the Direct route. HNIs are slightly better at 27%, but it is the institutional investors who are making the best use of the Direct route.

In the last few months, the AMFI monthly trend report has shown a shift of retail assets from beta assets to alpha assets. It remains to be seen if the recent SEBI pronouncements on small and mid-cap funds is going to have an impact on retail appetite.