Mutual fund folio growth: how the December 2023 story panned out

12 Jan 2024 , 10:54 AM

While flows were negative in the month of December 2023 into mutual fund, that was largely on account of the negative treasury flows in debt funds. Each quarter, the companies have advance tax payments and they normally fall back upon their liquid fund holdings to pay these statutory liabilities. Other than the debt funds, especially the short duration debt funds, the equity funds and hybrid funds saw strong positive inflows in the month of December. What was special about the month of December was that the total AUM (assets under management) of the mutual fund segment as a whole crossed the Rs50 trillion mark for the first time ever. At Rs50.78 trillion, it is just about $610 billion; or just about 3% of the total AUM of mutual funds in the US. But, as the US experience shows, it is from this phase that the momentum growth in MF AUM starts off.

Why the focus on Mutual Fund folios then?

While it is great to pat ourselves on the back for the growth in AUM, there are two problems in looking at just the AUM. Firstly, AUM is not just about flows but also about market value accretion. Much of the accretion in AUM in the recent past has come from the sharp rally in the Nifty and the Sensex. The other aspect is that AUM does not capture the spread of retail participation, which is better captured by the folio numbers. Unlike the growth in AUM, which can be led by institutions or HNIs; the folio growth is a better barometer of retail participation. In last 3 years, the surge in mutual fund folios has been led by the Gen-X and Gen-Z investors. Such trends become apparent only when you look at folio growth. Unique folios may not be unique investors, but they give a fairly reliable picture. Here are how the MF folios grew across categories. 

MF Folios: Macro picture for December 2023

How does the macro picture for December 2023 for mutual fund folios look like across open-ended and close-ended funds?

Macro picture	Total Folios Dec-23	Total Folios Dec-22	Folio Growth
Open ended Funds	16,43,01,894	14,06,11,179	16.85%
Closed Ended and Interval Funds	5,88,378	5,08,411	15.73%
Grand Total	16,48,90,272	14,11,19,590	16.84%

Data Source: AMFI 

At a macro level, the total number of mutual fund folios as of December 2023 stood at 16.48 crore folios compared to 16.18 crore at the end of November, 15.96 crore folios at the end of October, and 15.71 crore folios at the end of September 2023. On a yoy basis over December 2022, total folios are up 16.84% overall, which his better than 15.78% yoy growth in folios in November and 14.79% folio growth in October 2023. 

This ratio has been consistently improving over the last 5 months. In the last few months, even the closed ended folios have shown growth on a yoy basis and that is due to surge in demand for fixed term plans (FTP). These FTPs are a good strategy to lock in higher yields when yields are expected to trend lower. However, despite this positive picture, the close-ended folios account for just about 0.36% of the total mutual fund folios in India.

Debt fund folios growth tapers in December 2023

Debt fund folios had been under pressure in recent months. After 5 months of positive yoy folio growth, the month of December saw negative growth in folios, albeit very small. For December 2023, the folios contraction of debt funds was -0.10% compared to growth of 0.59% in November, and 0.72% in October. Since July 2023 there had been consistent accretion in debt fund folios each month, with December the first month of negative folio growth for debt funds in the second half of 2023.

Active Debt Funds	Total Folios Dec-23	Total Folios Dec-22	Folio Growth
Long Duration Fund	47,045	31,675	48.52%
Overnight Fund	8,40,161	6,20,274	35.45%
Gilt Fund	1,79,247	1,69,867	5.52%
Money Market Fund	4,39,156	4,27,888	2.63%
Dynamic Bond Fund	2,21,633	2,17,883	1.72%
Liquid Fund	17,85,882	17,81,537	0.24%
Ultra Short Duration Fund	6,40,611	6,42,187	-0.25%
Medium to Long Duration Fund	1,02,463	1,06,888	-4.14%
Corporate Bond Fund	5,84,740	6,16,661	-5.18%
Medium Duration Fund	2,38,510	2,53,843	-6.04%
Gilt Fund with 10 year constant duration	39,170	42,357	-7.52%
Low Duration Fund	8,97,877	9,73,985	-7.81%
Short Duration Fund	4,72,416	5,17,483	-8.71%
Floater Fund	2,22,744	2,45,907	-9.42%
Banking and PSU Fund	2,66,424	3,03,474	-12.21%
Credit Risk Fund	2,17,942	2,51,057	-13.19%
Total of Debt Funds	71,96,021	72,02,966	-0.10%

Data Source: AMFI

What are the key takeaways from a yoy comparison of debt fund folios as of December 2023. Out of the 16 categories of debt funds available in India as per AMFI classification, 5 categories showed at least 1% expansion in the number of folios, while 10 fund categories saw contraction in folios and one was flat. Liquid funds grew folios at less than 1%. The ratio of contracting folios to expanding folios has been static for the last 6 months at 9:7 and it has changed to 10:6 this month. That means; the undertone has just weakened in December 2023. The leader of the pack was Long duration fund folios, which grew 48.52% yoy, albeit on a relatively small base. However, overnight funds grew folios at 35.45%, even on a much larger base. The broad message is that investors are more than willing to lock themselves into longer durations at higher yields. Even gilt funds and dynamic bond funds have seen positive growth in folios. 

There are the standard suspects in negative folio growth among debt funds were credit risk funds, banking & PSU funds, floater funds and short duration funds. Folio growth has been negative where there is asset quality risk or too much managerial discretion given; as investors are uncomfortable with both. Then there are floater funds, where there is absence of investment options. Debt fund folios contracted on a yoy basis by a marginal -0.10% in December 2023. However, this was the first time in the last 6 months that we saw a contraction in folios yoy for debt funds.

Equity funds dominated folio growth in December 2023

In contrast to debt funds, there was little ambivalence in the growth of equity fund folios in December 2023. In the case of equity funds, the macro level folio expansion improved further to 19.02% in December; compared to 17.76% in November 2023, 16.78% in October 2023, 15.75% in September 2023, 15.01% in August 2023, 13.66% in July 2023, and 12.71% in June 2023. December 2023 folio growth story for equity funds surely stands out.

Active Equity Funds	Total Folios Dec-23	Total Folios Dec-22	Folio Growth
Small Cap Fund	1,69,19,143	1,00,99,288	67.53%
Multi Cap Fund	52,95,021	38,12,088	38.90%
Dividend Yield Fund	8,15,925	5,91,575	37.92%
Value Fund/Contra Fund	56,42,727	44,53,986	26.69%
Mid Cap Fund	1,28,57,604	1,01,78,944	26.32%
Sectoral/Thematic Funds	1,54,15,537	1,29,03,923	19.46%
Large & Mid Cap Fund	86,78,915	75,67,749	14.68%
Flexi Cap Fund	1,35,05,690	1,25,19,930	7.87%
ELSS	1,55,63,623	1,46,03,730	6.57%
Large Cap Fund	1,32,01,818	1,28,95,270	2.38%
Focused Fund	50,96,592	53,12,917	-4.07%
Total of Equity Funds	11,29,92,595	9,49,39,400	19.02%

Data Source: AMFI

In December 2023, a total of 10 out of the 11 categories of equity funds as per AMFI classification saw accretion in folios. That is a strike rate of an impressive 91%. The only equity fund category to see contraction in folios in December 2023 was Focused Funds, with folios shrinking by -4.07%. This was the in the previous two months also, due to base effect and absence of NFOs. Small cap funds continue to top the folios growth at 67.53%, as retail investors showed a clear preference for alpha. 

Oher growth stories in terms of equity fund folios were multi-cap funds at 38.90%, dividend yield funds at 37.92%, value funds at 26.69%, and mid-cap funds at 26.32. The rankings on folios growth are almost constant. There are two trends one can decipher. Large cap folio growth is facing stiff competition from passive index funds and index ETFs. On the other hand, the alpha heavy small cap funds, dividend yield funds, value funds and mid-cap funds are still attracting folio accretion. Managerial discretion is a grey area with folios shift from flexi cap funds to multi-cap funds. Investors prefer a more structured approach; which is why the preference appears to be for multi-cap funds over flexi cap funds. Equity fund folios growth at 19.02% in December 2023 is an indication that the growth in the AUM is happening with the salutary backing of folio growth too.

Hybrid folio growth is still dominated by multi-asset allocation funds

Here we have combined hybrid funds with solution-based funds to give a realistic picture of hybrids. Folios have grown across categories, except arbitrage funds. The folios growth in BAFs has been relatively flat. Arbitrage Funds attracted maximum flows but folios growth has been negative, showing a good degree of consolidation among corporates happening.

Hybrid / Solution Funds	Total Folios Dec-23	Total Folios Dec-22	Folio Growth
Multi Asset Allocation Fund	15,81,885	9,06,953	74.42%
Equity Savings Fund	3,87,874	3,62,710	6.94%
Retirement Fund	28,38,369	27,38,857	3.63%
Conservative Hybrid Fund	5,32,127	5,17,176	2.89%
Childrens Fund	29,63,599	29,16,524	1.61%
Aggressive Hybrid Fund	53,53,979	52,84,156	1.32%
Dynamic Asset Allocation/BAF	44,52,194	44,22,908	0.66%
Arbitrage Fund	4,67,679	4,68,208	-0.11%
Total of Hybrid Funds	1,85,77,706	1,76,17,492	5.45%

Data Source: AMFI

Out of the 8 categories of hybrid and solution-based funds available in India as per the AMFI classification, 7 categories saw folio expansion. Arbitrage funds saw contraction of -0.11% in folios (which is just about a marginal fall). Dynamic Asset Allocation Funds (BAFs), which had seen a fall in folios last month, saw marginal expansion in folios by 0.66% in December 2023. In recent months, the big folio growth leader has been multi-asset allocation funds; despite the base growing gradually. NFOs are just one part of the story. Over the longer period, there is now anecdotal evidence that multi-asset allocation funds have not only outshone in terms of returns but also emerged as better risk managers in a volatile market. That is logical since 90% of portfolio return variations emanate from asset allocation and that is what these multi-asset allocation funds focus on. Investors are veering around to that view.

The 74.42% folio growth in multi-asset allocation funds continues to be the highlight of hybrid fund folios growth. Investors are looking to auto hedge risks by spreading across asset classes and here you get multiple asset classes with the benefit of allocation. All other categories saw single-digit growth in folios. For the hybrid category of funds, number of folios grew by 5.45% in December; compared to 5.01% in November, 4.33% in October 2023; 3.67% in September 2023, and 2.74% in August 2023. Momentum is positive!

Passive funds still enjoy 100% strike rate in folio growth

Under passive category, we have included equity and debt related index products, apart from gold funds and Fund of Funds (FOF). You can call them passive products or benchmarked products; but the intent is there is no focus on alpha. The focus of these passive funds is on mimicking the index or asset class and minimizing tracking error. Even though the AUMs may be flat for passive funds, folios are still sharply higher on a yoy basis.

Passive Funds	Total Folios Dec-23	Total Folios Dec-22	Folio Growth
Index Funds	62,83,447	32,10,377	95.72%
Fund of funds investing overseas	15,17,039	12,51,851	21.18%
Other ETFs	1,28,23,860	1,17,50,774	9.13%
GOLD ETF	49,11,226	46,38,319	5.88%
Grand Total	2,55,35,572	2,08,51,321	22.47%

Data Source: AMFI

Passive funds are the only segment of mutual funds, where all the categories saw expansion in the number of folios. Passive fund folios gained in the last one year from targeted NFOs and a preference for passive products; on the equity and debt side. Index funds dominated the folio growth at 95.72% followed by international FOFs at 21.18%. Index ETFs and gold ETF followed behind with single-digit folio growth. Passive fund folio growth improved to 22.47% in December 2023; compared to 21.23% in November 2023, 19.40% in October 2023, 17.86% in September 2023, 17.08% in August 2023, and 14.79% in July 2023. Folio growth continues to remind us that Indian equity markets are becoming inclusive and this includes the passive fund story also. It is not just about big investors, but small investors are coming into mutual fund by the millions.