Key mutual fund trends observed in July 2023

16 Aug 2023 , 09:48 AM

We know that the overall AUM of mutual funds crossed the Rs46 trillion mark for the first time in history in the month of July 2023. We also know that the SIP flows in July 2023 crossed Rs15,000 crore for the first time ever. However, mutual fund trends are not just about AUM and SIP flows, but a lot more. That is why, the Association of Mutual Funds of India (AMFI), releases key trends in mutual funds based on industry level data each month. These trends, which have just been released for July 2023, pertain to the overall AUM of mutual funds, the mix and colour of the AUM and also the mix of the nature of investors. Apart from a geographical analysis of fund holdings, the monthly analysis of AMFI also provides value added analytics like ageing of equity fund investments and average holding period. Here are some key trends observed in mutual fund data for the month of July 2023.

Key Trends in Mutual Funds – Industry level (July 2023)

The industry level mutual fund trends as of July 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 touched a life-time high of Rs46.28 trillion as of the close of July 2023. That translates into dollar AUM of $560 billion. On a yoy basis, the mutual fund AUM has grown by 22.5% compared to July 2022. That was partially due to inflows and largely due to Nifty rally.

   

• In the last couple of years, we have seen a gradual shift in the AUM from active debt to active equity, although that trend had been arrested to some extent in the last few months. Despite the inflows into treasury funds in July 2023, the inflows into longer duration debt funds have still been tepid. That is why, the share of active debt funds fell from 20.5% to 19.4% YOY, while it fell by 40 bps MOM. Between July 2022 and July 2023, the market share of equity oriented funds (including aggressive equity balanced) has gone up from 50.1% to 52.0% of the overall AUM mix. 

   

• Over the last 1 year, the share of liquid funds in the overall AUM has fallen from 17.4% to 15.7%. The liquid funds did see an increase in share in June 2023 but again fell in July as the spike in bond yields worked against these funds in terms of AUM, despite strong inflows into short duration funds. 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 12.0% to 12.9%. In the last couple of months, the share of passives has fallen below the 13% share mark, but that is more due to a shift in focus to active funds amidst a sharp rally in the markets. 

   

• Are we seeing individual investors playing a bigger role in mutual fund investments as compared to institutional investors, in terms of AUM share? The answer would certainly be an emphatic “Yes.” The surge in young Gen-Z and millennial investors in mutual funds has led to a surge in the number of SIPs, which has substantially boosted individual participation in mutual funds. In July 2023 alone, the SIP flows were at an all-time record of Rs15,245 crore at a gross level. Between July 2022 and July 2023, the share of individuals in the overall AUM composition has gone up from 55.9% to 57.5%. Even on a MOM basis, the share of individuals in mutual fund AUM has increased by 20 bps. Correspondingly, the share of institutions and corporates in the overall mutual fund AUM has fallen from 44.1% to 42.5%.

   

• How much have individual investors allocated to each of the different categories of mutual funds like debt, equity, liquids, and ETFs? For instance, 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, which are actually meant for them. It is the institutions and corporates taking away 90% of the passive market.

   

• Let us turn to the individual mutual fund allocation basket. As of July 2023, individual investors have 81% of their mutual fund assets in equity related schemes and 14% in longer period debt funds. This has only changed marginally over last month. Obviously, liquid funds at 3% and ETFs at 2% are fairly insignificant. In contrast, institutional investors and corporates have 33% of their corpus in liquid funds, 27% in ETFs / FOFs, 27% in long period debt funds and just 13% in active equity funds. The institutional basket has not undergone any change in mix in the last 5 months.

To sum up the industry level story of mutual funds in July 2023, overall assets of mutual funds in India have grown by 22.5% yoy. This has been driven by a mix of flows into debt funds and value accretion in equity funds. Out of the institutional investments into mutual funds, 95% are accounted for by corporate investments and the balance 5% from investment institutions.

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

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

• There were total of 15.14 crore folios as of the close of July 2023 of which retail investors accounted for 91.2% of the total folios; slightly higher than in the previous month. In addition, HNIs accounted for 8.2% of the folios while institutions accounted for the balance 0.6% of the total folios. 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 fairly high share of folios of liquid funds (20.1%) and hybrid funds (22.6%); which are incidentally targeted largely 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. Between March 2009 and September 2014, the number of folios had fallen from 4.76 crore to 3.95 crore. However, between September 2014 and July 2023, the number of mutual fund folios have jumped sharply from 3.95 crore to 15.14 crore. That is a jump of 283% in folios since the current NDA government assumed power at the centre. That indicates substantial financialization of savings and also 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 gone up in the month from Rs0.68 lakhs to Rs0.76 lakhs. But there is one more inference that we can draw, and 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 the data of July 2023, retail investors hold nearly 51.4% of the equity fund assets for mor than 2 years. This is up from just 43.7% in 2022. It clearly shows a lot more stickiness among the retail investors when it comes to equity funds. In fact, retail investors have been observed to be holding about 75% of the equity fund assets for a period of at least 1 year.

It is not just that the number of folios increased sharply, which is a reality anyways. Retail investors are becoming more patient with equity funds and taking wealth creation seriously. More importantly, 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 allow compounding to happen. 

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

Mutual fund marketers would tell you that much of incremental sales of mutual funds come from tier-2 and tier-3 cities. Today, semi-urban investors are known to look beyond traditional assets like bank FDs, land, and gold. Greater digital connectivity has brought millions of small investors into the investment mainstream

• The mutual fund market is divided into the T30 (top-30) cities and the B30 (cities beyond top-30). If you compare July 2023 over June 2023, total assets of T30 centres increased by 3.13% to Rs38.41 trillion while the total assets of B30 centres increased by 3.78% to Rs7.87 trillion. Of course, total assets are also a function of market value accretion, but the growth has been captured by the B-30 cities in July 2023.

   

• How do the T30 and the B30 cities look in terms of composition of their assets in the overall picture? On a yoy basis, the AUM of the T30 cities and the B30 cities have increased. In fact, today B30 cities account for 17% of the overall AUM of mutual funds. That looks small, but surely the folio accretion is coming from these smaller cities.

   

• The B30 cities had a higher preference for equity assets as compared to the T30 cities in July 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. However, the equity fund share of B-30 has gone up from 79% to 80%.

   

• To get a more granular picture of the T30 / B30 story, let us look at just individual assets rather than total assets. Nearly 26% of Individual assets as of July 2023 are located in B30 cities and 74% in T30 cities. Clearly, people in B30 cities are becoming more investment savvy and SIPs are helping the cause.

   

• The SEBI had banned entry loads in 2009 and introduced Direct schemes in 2013. However, 46% of the overall assets have come 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 making the best of direct plans.

   

• There are interesting insights from the state rankings in mutual fund intensity. Maharashtra, Delhi, and Gujarat lead in state-wise AUM, which is hardly surprising. If you look at MF AUM as share of state GDP, then Goa, Chandigarh, and Haryana figure in the top-6; apart from Mumbai, Delhi, and Gujarat. These states also feature in the top-6 in terms of per capita AUM. 

Clearly, mutual funds are becoming the default option for serious investors interested in long term wealth creation. This is spreading much faster than expected to smaller towns and, that too, at a rapid pace. That is playing a big role in financialization of household savings, which is a good trend for Indian markets.