Key mutual fund trends observed in October 2023

22 Nov 2023 , 09:19 AM

As of the close of October 2023, the average AUM stood at Rs47.80 trillion; exactly at the same level as the previous month. SIP flows in October 2023 crossed Rs16,800 crore while the NFO (new fund offering) flows were relatively tepid at over Rs3,638 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 October 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 (October 2023)

Mutual fund segment level trends for October 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 Rs47.79 trillion as of the close of September 2023 and for October it has remained absolutely flat at Rs47.80 trillion. That translates into dollar AUM of $575 billion. Compared to September 2023, the AUM growth in October was flat since the higher inflows were largely offset by the fall in the index levels resulting in capital depletion of equity investments. On a yoy basis, the mutual fund AUM has grown by a healthy 20.93% compared to October 2022. That was largely due to inflows and partially due to Nifty rally; which has been relatively volatile 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 October, the share of debt funds was flat compared to September as were the passives. However, equity fund share was marginally higher while liquid funds saw the share fall. On a yoy basis, the share of active debt funds fell from 19.5% to 18.8% YOY, while it was flat MOM, thanks to strong debt inflows in October 2023. Between October 2022 and October 2023, the market share of equity oriented funds (including aggressive equity balanced) has gone up from 51.6% to 54.3% of the overall AUM mix. That is a big positive shift for equity funds. However, on a sequential MOM basis, the share of equity funds is up just 20 basis points; as the positive flows were offset by falling equity markets.

   

• Over the last 1 year, the share of liquid funds in the overall AUM has fallen 200 bps from 16.1% to 14.1%. The share is, however, only marginally on a MOM basis by 20 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. Passive funds, comprising of index funds, equity index ETFs, debt index ETFs and fund of funds (FOFs) have fallen by 10 bps over the last one year from 12.8% to 12.7%. This is the fifth  month in a row that the market share of passive funds has been below 13%. However, the share of passive funds was flat on a sequential MOM basis.

   

• 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. 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 October 2023, gross SIP flows were at a record high of Rs16,828 crore; a classic barometer of retail appetite for the IPO. Between October 2022 and October 2023, the share of individual investors in the overall AUM composition has gone up from 57.5% to 58.9%. Even on a MOM basis, the share of individuals in mutual fund AUM has increased by 10 bps; which is small but steady. At the same time, the share of institutions and corporates in the overall mutual fund AUM has fallen over the last one year from 42.5% to 41.1%. 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 October 2023, individual investors have a share of just 40% in debt oriented schemes and 13% 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 of passive funds like equity and debt index funds as well as index ETFs. Retail investors are not leveraging passive products, but the good news is that the overall individual investor shares have remained constant in the last one year.

   

• Let us turn to the individual investor allocation basket. As of October 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 long period debt funds and 15% in active equity funds. The shift to equity funds by institutions is on higher valuations and the arbitrage fund demand.

As of the close of October 2023, overall assets of mutual funds in India have grown by 20.93% yoy. Assets of individual investors in this period grew by 23.80% while the growth in assets of institutional investors also grew at an improved 17.03%. 

Key trends in mutual funds – Folios and Ticket sizes (October 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 15.97 crore folios as of the close of October 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 month. 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 the last few months.

   

• 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 mutual fund folios had actually contracted from 4.76 crore to 3.95 crore. However, between September 2014 and October 2023, the number of mutual fund folios have jumped sharply from 3.95 crore to 15.97 crore. That is a jump of 304.30% 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 16.63%.

   

• 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. But there is one more interesting takeaway, which beats popular logic. The general belief is that retail investors generally 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 October 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 the investors who stuck on to SIPs, ended up laughing all the way to the bank when the economy recovered and set the tone for a structurally prolonged bull market in India.

The positive takeaway 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. Now, retail investors are becoming more patient with equity funds and taking wealth creation and financial planning more seriously. Long term wealth creation is for the investors who let compounding happen; come hell or high water. That is the message!

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. 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 there is a genuine buy-in.

• The mutual fund market is divided into the T30 (top-30) cities and the B30 (cities beyond top-30). If you compare October 2023 over September 2023, total assets of T30 centres marginally lower at Rs39.40 trillion compared to Rs39.41 trillion last month. The total assets of B30 centres increased by 0.21% to Rs8.40 trillion in October 2023. Clearly, the AUM growth has been captured by the B-30 cities in October 2023. The share in AUM o fB-30 locations, has improved MOM from 17% to 18%. The growth becomes clearer if you consider the 25% yoy growth in B-30 AUM over the last one year.

   

• The B30 cities had a higher preference for equity assets as compared to the T30 cities in August 2023 at 81% compared to just 48%. However, this data has to considered as qualified data 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 it looks like corporates and institutions are the big beneficiaries of the direct route.

To sum it up the story of October 2023, the AMFI monthly report suggests that mutual funds are becoming the default option for serious investors. In last 2 months, individual investors gained ground and equity as an asset class has also gained ground. However, investors are taking debt a lot more seriously too. This shows a penchant for asset allocation. Above all, it is the smaller towns that are driving the growth in the mutual fund cult. Call it Financialization 101; and it is happening to household savings at a frenetic pace.