Key mutual fund trends observed in March 2023

26 Apr 2023 , 11:14 AM

These trends pertain to the overall AUM, the mix of the AUM and the mix of the retail and institutional investors. Here are some key trends observed in mutual fund data for the month of March 2023.

Key Trends in Mutual Funds – Industry level

The industry level mutual fund trends as of March 2023 are at a macro level and have more to do with the colour and direction of the flows.

• Average assets under management (AAUM) of all mutual funds touched Rs40.05 trillion as of the close of March 2023. That translates into dollar AUM of nearly $500 billion. On a yoy basis, the mutual fund AUM has grown by 6.22% compared to March 2022. That can be explained by limited net inflows, tempered by equity  market losses.

   

• In the last couple of years, we have seen a gradual shift in the AUM from active debt to active equity. In addition, there has also been a shift towards passive schemes. The data as of March 2023 has only reinforced that trend. Between March 2022 and March 2023, the market share of equity oriented funds (including aggressive equity balanced) has gone up further from 48.9% to 51.6% of the overall AUM mix. During this period, the share of active longer period debt funds fell from 23.1% to just 19.6% while liquid funds fell from 16.4% to 15.8%. Interestingly, this period saw passive ETFs and FOFs spruce up their share of AUM further from 11.6% to 13.1%.

   

• The confluence of a new breed of young investors entering mutual funds and a surge in the number of SIPs has been increasing individual participation in mutual funds. For March 2023, even the numbers corroborate that assumption. For example, between March 2022 and March 2023, the share of individuals in the overall AUM composition has gone up from 55.2% to 58.1%. Correspondingly, the share of institutions and corporates has fallen from 44.8% to 41.9%.

   

• Let us break up the above individual mix further and find out how much share they have in each of the asset categories of mutual funds. For instance, individual investors have a share of just 41% in debt schemes and 15% in money market schemes. That is understandable since these are largely treasury products. However, individual investors have a whopping 89% share of equity fund AUM. What is surprising, and also rather disappointing, is that individual share of ETFs and FOFs is just 11% of AUM. That means, passive investing is still something that is an institutional domain.

   

• So, how does the individual investment basket look like? As of March 2023, individual investors have 79% of their mutual fund assets in equity funds and 15% in longer period debt funds. Obviously, liquid funds at 4% and ETFs at 2% are fairly insignificant. In contrast, institutional investors and corporates have 32% of their corpus in liquid funds, 28% in ETFs / FOFs, 27% in long period debt funds and just 13% in active equity funds. Institutions are obviously playing the passive game more astutely.

To encapsulate the industry level flow and AUM story, between March 2022 and March 2023, the overall assets of mutual funds have grown by 6.2%. While the institutional growth was negative in the year, the individual assets actually grew by 11.8% in the year. That is the good news from a flow standpoint.

Key trends in mutual funds – Folios and Ticket sizes

Folios have emerged as a veritable method of measuring the retail appetite since they represent accounts unique to an AMC. There are still duplications but the trends give a fair idea of which way the retail wind is blowing. 

• There were total of 14.57 crore folios as of March 2023 of which retail investors accounted for 91.1% of the total folios. In addition, HNIs accounted for 8.2% of the folios while institutions accounted for the balance. However, the retail share of folios comes down drastically when we look at debt funds. Here, retail investors account for just 67.5% of the folios, while HNI investors account for 30.7% of the folios. HNIs also have a fairly high share of liquid funds and hybrid funds.

   

• When we look at folios, the big story to remember is the growth in folios that has been geometric since the global financial crisis of 2008-09. In fact, post the financial crisis, there was a 5 year period when the folios actually compressed. Between March 2009 and September 2014, the number of folios actually compressed from 4.76 crore to 3.95 crore. However, between September 2014 and March 2023, the number of mutual fund folios have jumped sharply from 3.95 crore to 14.57 crore. That is nearly a jump of 270% in the number of folios over an 8 year period.

   

• There are two positive takeaways in terms of folios and retail holding period. Firstly, the average ticket size of a retail investors in equity funds has gone up to Rs0.71 lakhs. This is largely due to the persistence of SIPs. Also, the data appears to contradict the general apprehension that retail investors tend to be very myopic in their equity fund investments. As per the data of March 2023, retail investors hold nearly 57.2% of their equity fund investments for a period of more than 2 years while they hold more than 75% of the retail assets for a period of more than 1 year, at least.

To sum up the folios story, it is not just that the number of folios has increased sharply. Retail investors are also becoming more patient with equity funds and are also committing more savings. It is now for the funds to deliver the goods on a consistent basis.

Key trends in mutual funds – Geographical mix

One of the interesting trends observed in the last few years has been that investors from smaller towns are increasingly becoming interested in equity and equity funds. It is no longer the old obsession with land and gold. That is changing as smaller towns are opening up to the financialization of savings. Here is what the data says for March 2023.

• Broadly, the mutual fund market is divided into the T30 (top-30) cities and the B30 (cities beyond top-30). 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 may still be small overall, but they have been growing at a rapid pace. Also, on a yoy basis, the AUM of the B30 cities has grown by 9.6%. This growth of B30 cities has been driven by greater awareness, higher income levels and also an incentive structure that makes it more lucrative for distributors in B30 cities.

   

• The B30 cities appear to have a higher tendency for equity assets as compared to the T30 cities. However, this data cannot be taken at face value since the T30 cities are where most of the institutional treasuries are located and that would skew the mix away from equity fund AUM. Now for the positive side. If you look at the individual asset mix as of March 2023, then 26% of individual assets are located in B30 cities and 74% in T30 cities. Clearly, people in B30 cities are becoming more investment savvy.

One final thought is that the retail investors still do not appear to be making the best of direct schemes, as less than 15% of retail equity AUM comes through the direct route. That is something, the HNIs and institutions appear to be leveraging better.