Key mutual fund trends observed in July 2024

16 Aug 2024 , 09:28 AM

MUTUAL FUND STORY IN JULY 2024

The month of July 2024 saw the overall mutual fund AUM rise to ₹64.97 Trillion; compared to ₹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 normal at quarter ends), the month of July 2024 saw net inflows into debt funds to the tune of ₹1.20 Trillion in July. However, amidst the debt bounce, even equity funds and other categories continued to flatter. Active equity funds saw monthly inflows of₹37,113 Crore; which is lower than the record ₹40,608 Crore in June 2024, but higher than ₹34,697 Crore of equity fund inflows recorded in May 2024.

SIP flows in July 2024 touched a record ₹23,332 Crore. This is the fourth consecutive month that the mutual fund monthly gross SIP flows have been above ₹20,000 Crore. The month of July 2024 also saw a record 72.62 Lakh fresh SIP accounts being opened as compared to 55.13 Lakh fresh SIP accounts in June 2024, and 49.74 Lakh fresh SIP accounts in May. The NFO (new fund offering) flows were also robust at ₹15,565 Crore, dominated by Sector / Thematic funds and multi-cap funds; and to a lesser extent passive index funds.

EVEN SIP STOPPAGE RATIO HAS IMPROVED IN JULY 2024

While these are the actual numbers pertaining to mutual funds in India, there is more good news on the mutual funds front. Here we are referring to the SIP stoppage ratio. Remember, AMFI reports gross SIP flows and these 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 had already sobered to 58.68% in July 2024. In July 2024, the SIP stoppage ratio further tapered to 51.40%.

However, the cumulative SIP stoppage ratio for the first 4 months of FY24 still remains fairly high at 60.91%; 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 July 2024 throws interesting stories about the growth of mutual funds in India. These stories 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 (JULY 2024)

Mutual fund segment level trends for July 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, touched a life-time high of ₹64.71 Trillion in July 2024; compared to ₹61.33 Trillion in June 2024, ₹58.60 Trillion in May 2024, ₹ 57.01 Crore in April 2024, and ₹55.01 Trillion in March 2024. That translates into dollar AUM of $773 Billion. In July 2024, the average AUM and the closing AUM were both sharply higher compared to June 2024. In July 2024, the accretion in equity AUM 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 July 2024 has grown by a healthy 39.82% compared to July 2023. The bull rally of 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 July 2024, active equity funds and liquid funds gained AUM share while the share of active debt funds and passive funds was lower. This can be attributed to the relative value gain by equity funds. The net results was that, active equity fund share in July 2024 surged by 30 bps from 59.6% to 59.9% over June 2024 while the share of active equity funds in overall AUM is 790 bps higher on yoy basis.
• Passive fund share was down 10 bps from 12.8% to 12.7% in July 2024 while it is 20 bps lower on yoy basis. Here, one must remember that passive funds include index-based equity products and also index-based debt products. Active debt funds share was down by 50 bps from 15.1% to 14.6% in July 2024 over June 2024 while it is down 480 bps on yoy basis. Finally, let us turn to liquid / money market funds. The share was up 30 bps at 12.8% in July 2024 compared to June 2024, while it is down 290 bps on yoy basis. The MOM spike in liquid funds AUM is on account of short end treasury flows in July 2024.
• On a yoy basis, the share of liquid funds has been volatile due to the strong influence of treasury flows on liquid funds. In the case of active longer term debt funds, the challenge is waning debt fund flows on account of high interest rates and absence of any trajectory of a fall in rates specified by the RBI. Hopefully, once the RBI implements its first rate cut later this year, the trend should change in favour of debt funds.
• Are individual investors playing a bigger role in mutual fund AUM compared to institutions? You would, perhaps, intuitively say an emphatic YES. However, it is not just about intuition but this trend is also borne out by data. One reason could be that the surge in SIP flows and NFOs; both of which are predominantly retail products. SIP flows at ₹23,332 Crore and the NFO flows of ₹15,565 Crore, come largely from the Gen-Z and millennial investors with a financial planning perspective. Hence these flows tend to be stickier. This segment also reflects India’s demographic dividends. Another factor could be that the reduced interest in debt funds is forcing investors to gravitate towards equities in search of higher returns. It is almost like the TINA factor at play.
• In July 2024, gross SIP flows were at a record high of ₹23,332 Crore; a credible barometer of retail intensity of equity fund flows. Between July 2023 and July 2024, the share of individual investors in the overall AUM composition has gone up by 350 basis points from 57.5% to 61.0%. However, on MOM basis, the share of individuals in mutual fund AUM is down 10 bps from 61.1% to 61.0%; largely due to strong institutional treasury flows in July 2024. On the other hand, the share of institutions and corporates in the overall mutual fund AUM has fallen over the last one year from 42.5% to 39.0%. In December 2023, retail share crossed 60%; and has sustained continuously since then.
• How much have individual investors allocated to various categories of mutual funds like debt, equity, liquids, and ETFs? As of July 2024, individual investors have a share of a mere 37% in debt oriented schemes and 12% in short term money market schemes. These shares have remained steady. Now, these are treasury products with institutional appetite, so it is understandable that retail share is quite low. But, individual investors have an imposing 88% market share of equity fund assets. What is surprising is that, 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 the predominance of corporates in passive products. Retail investors are yet to get comfortable with passive products.
• Let us turn to the individual investor allocation basket. We are just looking at the asset mix the other way; that is how much of their corpus they have in various asset classes. As of July 2024, individual investors have 86% of their mutual fund asset portfolio in active equity schemes and 9% in active debt funds. Liquid funds at 3% 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, 24% in longer active debt funds and 18% in active equity funds. Within debt, the shift of corporates and institutions has been from the long end to the short end of the yield curve.

As of the close of July 2024, overall assets of mutual funds in India have grown by 39.82% yoy. Assets of individual investors in this period grew by 48.43% while the growth in assets of institutional investors was at a subdued 28.18%.

KEY TRENDS IN MUTUAL FUNDS – FOLIOS AND TICKET SIZES (JULY 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 19.84 Crore folios as of the close of July 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 static 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% of the folios. HNIs also have a high share of folios of liquid funds (20.1%) and hybrid funds (24.0%). These shares have gone up in the latest month of July 2024.
• Here is a longer term perspective. Between March 2009 and September 2014, the number of mutual fund folios contracted from 4.76 Crore to 3.95 Crore due to persistent outflows from equity funds. However, between September 2014 and July 2024, the number of mutual fund folios have jumped sharply from 3.95 Crore to 19.84 Crore. That is a jump of 402.3% in folios since the year 2014. The financialization of savings becomes apparent when you consider that folios grew at a CAGR (compounded annual growth rate) of 17.83% 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 overall AUM of Indian mutual funds at ₹64.97 Trillion is distributed across 19.84 Crore folios, giving a per folios ticket size of ₹3.27 Lakhs.
• The general presumption that retail investors tend to be less patient about investments; is actually a statistical myth propagated by many analysts. If you look at the numbers, it paints a different story, altogether. Unlike the popular perception, retail investors do not adopt a myopic approach to equity funds. As per data for July 2024, retail investors hold 54.7% of equity fund assets for more than 2 years (up sharply from last year). This is sharply up from 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. During the pandemic, the investors who stuck to their SIPs were laughing all the way to the bank. Clearly, it is time that matters more than timing; and retail investors are now realizing that.

KEY TRENDS IN MUTUAL FUNDS – GEOGRAPHICAL MIX (JULY 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 July 2024 with June 2024, total T30 assets are higher by 5.45% at ₹52.94 Trillion. Total assets of B30 centres increased by 5.75% to ₹11.77 Trillion in July 2024. Despite the index accretion positively impact all players, B-30 cities are driving a lot of incremental flows. To remove the overall institutional impact, we shall only look at the share of individuals. In July 2024, the B30 cities accounted for 26.76% of individual assets an increase of 13 bps compared to the previous month of June 2024.
• SEBI banned entry loads in 2009 and introduced Direct schemes in 2013. However, while 45% 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 best 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. However, now the interest in beta assets is coming back gradually. Above all, it looks like the intense retail participation in equities is here to stay!