Key mutual fund trends observed in May 2023

16 Jun 2023 , 03:07 AM

The Association of Mutual Funds of India (AMFI), releases key trends in mutual funds based on industry level data. These trends could either pertain to the overall AUM of mutual funds, the mix of the AUM or even the mix of the investors. Apart from a geographical analysis of fund holdings, the monthly analysis of AMFO also provides additional analytics like the ageing of equity fund investments and the average holding period. Here are some key trends observed in mutual fund data for the month of May 2023.

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

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

• Average assets under management (AAUM) of all mutual fund schemes touched a life-time high of Rs42.95 trillion as of the close of May 2023. That translates into dollar AUM of $521 billion. On a yoy basis, the mutual fund AUM has grown by 14.93% compared to May 2022. That was partially due to the base effect as May 2022 had seen a fall.

   

• In the last couple of years, we have seen a gradual shift in the AUM from active debt to active equity. Like in April, even in May, the debt funds held out strong and protected their market share, largely on account of robust flows into debt funds. Between May 2022 and May 2023, the market share of equity oriented funds (including aggressive equity balanced) has gone up from 49.1% to 51.3% of the overall AUM mix. 

   

• During one-year period, the share of active longer period debt funds fell from 22.4% to just 20.3% while liquid funds fell from 16.7% to 15.4%. The inflow of Rs1.70 trillion into debt funds in April and May 2023 combined has helped the share of debt funds hold up on MOM basis, although it is still lower on yoy basis. Equity funds are not only gaining from flows, but also from market accretion. Interestingly, this period saw passive ETFs and FOFs spruce up their share of AUM further from 11.8% to 13.0%.

   

• Are we seeing more individuals playing a bigger role in mutual fund investments? The answer would be an emphatic “Yes.” The combination of millennial investors in mutual funds has led to a surge in the number of SIPs, which has substantially boosted individual participation in mutual funds. For May 2023, even the numbers corroborate that assumption. For example, between May 2022 and May 2023, the share of individuals in the overall AUM composition has gone up from 55.0% to 57.7%. Correspondingly, the share of institutions and corporates in the overall mutual fund AUM has fallen from 45.0% to 42.3%.

   

• How much share have investors allocated to each of the asset categories of mutual funds. For instance, individual investors have a share of just 42% in debt schemes and 13% in short term money market schemes. These are largely treasury products, so that is OK. However, individual investors have an imposing 89% share of equity fund AUM. What leaves to be desired, is that individual share of ETFs and FOFs is just 11% of AUM. Retail investors are apparently not leveraging passive products as well as corporates.

   

• Let us turn to the individual allocation basket. As of May 2023, individual investors have 79% of their mutual fund assets in equity related schemes and 15% in longer period debt funds. This has not changed over April. 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. This has been static over the last 3 months.

To sum up the industry level story of mutual funds, overall assets of mutual funds have grown by 14.93%, driven by a mix of flows into debt funds and value accretion in equity funds. While the institutional asset growth was 8.13% yoy, the individual assets actually grew by an impressive 20.48%. It looks like individuals are slicing a chunk of the growth.

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

Folios are, perhaps, the best proxy for retail appetite as they represent accounts unique to an AMC. Notwithstanding duplications, folios tell you which way the wind is blowing.

• There were total of 14.74 crore folios as of the close of May 2023 of which retail investors accounted for 91.1% of the total folios; slightly lower than in April. In addition, HNIs accounted for 8.2% of the folios (spike over April) while institutions accounted for 0.7%. However, the retail share of folios comes down drastically when we look at active debt funds. Here, retail investors account for just 66.4% of the folios, while HNI investors account for 31.3% of the folios. HNIs also have a fairly high share of liquid funds and hybrid funds; which are incidentally targeted at the 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 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 May 2023, the number of mutual fund folios have jumped sharply from 3.95 crore to 14.74 crore. That is a jump of 273% in folios since the current government assumed power at the centre. That surely looks like good data to savour.

   

• There are two takeaways on folios and retail holding period. Firstly, average ticket size of retail investors in equity funds stands almost static at Rs0.68 lakhs. The folio holding data also contradicts the general apprehension that retail investors are myopic investors in equity funds. As per the data of May 2023, retail investors hold nearly 56.5% of their equity fund investments for a period of more than 2 years against the general equity average of 44.9%. Individual investors are not more long term than other classes of investors. They hold 75-80% of the retail assets for at least 1 year.

It is not just that the number of folios increased sharply. Retail investors are becoming more patient with equity funds and taking wealth creation seriously.

Key trends in mutual funds – Geographical mix

Mutual fund marketers would tell you that much of incremental sales of mutual funds come from tier-2 and tier-3 cities. For the non-urban investors, it is no longer the old obsession with land and gold. With greater digital connectivity, smaller towns are at the forefront of this shifting trend. 

• 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. 

   

• The B30 cities had a higher preference 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 good news. If you look at the individual asset mix as of May 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 and SIPs are helping out generously.

   

• There are some surprising 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. 

Two things emerge from the data. Mutual funds are becoming the first port of call for serious investors and the cult is spreading to smaller towns at a rapid pace. That is, perhaps, the real story of mutual funds playing a role in financial inclusion.