Key mutual fund trends observed in November 2023

17 Dec 2023 , 12:57 PM

As of the close of November 2023, the average AUM stood at Rs48.75 trillion; sharply higher than the previous month. SIP flows in November 2023 touched the Rs17,073 crore mark while the NFO (new fund offering) flows were relatively tepid at under Rs2,400 crore, but was largely dominated by the equity oriented funds like small cap funds and multi-cap funds.

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 November 2023 pertain to overall AUM of mutual funds, the mix and colour of the AUM and also the nature of investors. The AMFI report also provides value added analytics like ageing of equity fund investments and average holding period. One of the big trends we have seen in recent months is a greater focus on asset allocation by investors.

Key Trends in Mutual Funds – Segment level (November 2023)

Mutual fund segment level trends for November 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 combined, touched a life-time high of Rs48.75 trillion as of the close of November 2023, sharply higher than the AAUM of Rs47.80 trillion as of the close of October 2023. That translates into dollar AUM of close to $600 billion. Compared to October 2023, the AUM growth in November was sharply higher since the tepid inflows in comparison to October were more than offset by the sharp capital appreciation and the impact on equity indices in the month of November 2023. On a yoy basis, the mutual fund AUM has grown by a healthy 20.4% compared to November 2022. That was largely due to inflows and in equal measure due to Nifty rally; which has been relatively strong in the last one year.

   

• In the last couple of years, we have seen a gradual shift in the overall AUM mix from active debt to active equity. In November, the share of active debt funds was lower compared to October even as passives were flat. This can be attributed to negative flows into debt funds and the sharp appreciation in equity funds due to the rise in the index, which made the equity funds relatively heavier. As a result, equity fund share was marginally surged from 54.3% to 54.9% over previous month while liquid funds saw the share fall, marginally from 14.1% to 14.0%. On a yoy basis, the share of active debt funds fell from 19.0% to 18.5% YOY, while on an MOM basis also it was down by 30 bps from 18.8% to 18.5%, largely due to tepid debt inflows in November 2023. There is a big positive shift in equity funds. On a yoy basis, share of active equity funds is up 320 bps from 51.7% to 54.9%. As we stated earlier, equity funds market share is up 60 bps on a month-on-month basis also.

   

• Over the last 1 year, the share of liquid funds in the overall AUM has fallen 220 bps from 16.2% to 14.0%. The share is, however, only marginally on a MOM basis by 10 basis points. While a large part of the liquid fund flows is treasury flows in nature, there is also a quiet bounce in demand for arbitrage funds as an alternative for liquid funds. Equity market volatility has led to arbitrage funds yielding higher returns in a more tax efficient manner. The new rules on debt funds are also making liquid funds less attractive. Passive funds, comprising of index funds, equity index ETFs, debt index ETFs and fund of funds (FOFs) have seen their share static on a MOM basis at 12.7%. This is the sixth month in a row that the market share of passive funds has been below 13% and it has lost 40 bps in market share over the last one year. 

   

• Are individual investors continuing to play a bigger role in mutual fund AUM as compared to institutional investors; as has been the trend in recent months? If you look at the AUM share, the answer is fairly unequivocal and this could have a lot to do with the SIP flows. The massive influx of Gen-Z and millennial investors into mutual funds; combined with the rapid rise of SIPs, has resulted in a surge in the number of retail folios as well as the retail AUM in this period. In November 2023, gross SIP flows were at a record high of Rs17,073 crore; a classic barometer of retail appetite for the IPO. FY24 promises to be another record year for SIP flows into India. Between November 2022 and November 2023, the share of individual investors in the overall AUM composition has gone up from 160 basis points from 57.60% to 59.20%. Even on a MOM basis, the share of individuals in mutual fund AUM has increased by 30 bps; which is very strong. 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 40.8%. It is largely about the surge in equity valuation and SIP flows.

   

• How much have individual investors allocated to each of the different categories of mutual funds like debt, equity, liquids, and ETFs? As of November 2023, individual investors have a share of just 40% in debt oriented schemes and 14% in short term money market schemes. These are largely treasury products, so that is understandable, as most of the demand comes from corporates and financial institutions. However, individual investors have an imposing 89% share of equity fund AUM, but just about 10% of AUM of passive funds like equity and debt index funds as well as index ETFs. The takeaway is that the retail investors are not leveraging passive products, the way the 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 each asset class. As of November 2023, individual investors have 82% of their mutual fund assets in equity schemes and 13% in active debt funds. Liquid funds at 3% and ETFs at 2% are fairly insignificant. On the other hand, institutional investors and corporates have 30% of their corpus in liquid funds, 28% in ETFs / FOFs, 27% in longer period active debt funds and 15% in active equity funds. The shift to equity funds by institutions is on higher valuations and arbitrage fund demand.

As of the close of November 2023, overall assets of mutual funds in India have grown by 20.4% yoy. Assets of individual investors in this period grew by 23.62% while the growth in assets of institutional investors stood at 15.97%. 

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

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

• There were total of 16.18 crore folios as of the close of November 2023 of which retail investors accounted for nearly 91.2% of the total folios. In addition, HNIs accounted for 8.2% of the folios while institutions accounted for the balance 0.6% of the total folios. These ratios have 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 66.5% of the folios, while HNI investors account for 31.1% of the folios. HNIs also have a high share of folios of liquid funds (20.1%) and hybrid funds (22.6%); which are targeted principally at the savvy HNI investors. These ratios have been static over last few months.

   

• When we look at folios, the big story is the geometric growth in folios post the financial crisis. Between March 2009 and September 2014, the number of mutual fund folios had actually contracted from 4.76 crore to 3.95 crore. However, between September 2014 and November 2023, the number of mutual fund folios have jumped sharply from 3.95 crore to 16.18 crore. That is a jump of 325.32% in folios since the year 2014. The impact on financialization of savings becomes apparent when you consider that the folios have grown in the last 9 years at a CAGR (compounded annual growth rate) of 16.7%.

   

• There are two takeaways on folios and retail holding period. Firstly, average ticket size across the mutual fund spectrum stands at Rs2.98 lakhs, while that AUM of retail investors in equity funds has been static at Rs0.76 lakhs on an average. These numbers have been static for some time now. Now for some surprises. The general belief is that retail investors tend to be less patient about investments. However, the average folio holding data contradicts this theory. In fact, the retail investors do not take a myopic approach to equity funds. As per data of November 2023, retail investors hold nearly 51.4% of the equity fund assets for more than 2 years. This is up from just 43.7% in 2022. It clearly shows a lot more stickiness among retail investors and could be induced by the experience of the pandemic, when people who exited their SIPs lost out on the recovery.

The good news is that retail investors are realizing the virtues of time over timing in the market, which explains the surge in SIP flows. In the long run, it is not just enough to invest, but to stay invested for as long as possible. 

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

Mutual fund marketers and even brokers admit that much of incremental sales of mutual funds are coming from tier-2 and tier-3 cities, where there is a lot of buy-in for the concept of systematically managed investing like SIPs. Today, semi-urban investors are looking beyond traditional asset classes like bank FDs, land, and gold; and mutual funds have emerged as a hot favourite. Greater digital connectivity is one reason, but intensive investor education has also contributed.

• The mutual fund market is divided into the T30 (top-30) cities and the B30 (cities beyond top-30). If you compare November 2023 over October 2023, total assets of T30 centres sharply higher at Rs40.18 trillion compared to Rs39.40 trillion last month. The total assets of B30 centres increased by 2.03% to Rs8.57 trillion in November 2023; compared to 1.96% growth for T-30 cities. The trend is not too clear since chunk of the AUM accretion for both categories of investors has come from index appreciation.

   

• The B30 cities had a higher preference for equity assets as compared to the T30 cities in August 2023 at 81% compared to just 49%. However, this data can be misleading, since most of the corporates and large institutional treasuries are based out of the T-30 centres, which could result in a skew of the data.

   

• For a more granular picture of the T30 / B30 story, let us look at individual assets rather than total assets. Nearly 26.18% of Individual assets as of October 2023 are located in B30 cities and 73.82% in T30 cities. Clearly, B30 cities are fast emerging as key players.

   

• SEBI had banned entry loads in 2009 and introduced Direct schemes in 2013. However, while 43-45% of the overall assets came through the Direct route, only 21% of the retail investors money came through the Direct route. HNIs are slightly better at 26%, but retail investors are not fully leveraging the power of direct plans to reduce costs.

To sum it up the mutual fund story of November 2023, AMFI monthly report suggests that mutual funds are becoming a natural choice for serious retail investors. In last 2 months, individual investors gained ground and equity as an asset class has also gained ground. Investors are taking debt a lot more seriously and that shows a penchant for asset allocation. The big trend is broader financialization of savings as smaller towns are driving the growth in the mutual fund cult. That is not bad at all!