Mutual fund folio growth: how the February 2024 story panned out

11 Mar 2024 , 10:41 AM

Fund AUM versus Fund folios

In February 2024, we saw robust flows into mutual funds at ₹1.18 Trillion. Out of the ₹1.18 Trillion of net flows into mutual funds in Feb-24, nearly 54% was accounted for by debt fund inflows. It needs no reiteration that debt funds are dominated by treasuries of corporates, institutional investors and HNIs. Hence, while they do account for AUM growth, they are not too strong on folios growth; or what is called the retail narrative.

That is where mutual fund folios come in handy. These folios capture the number of investor accounts. Currently, there are about 17.42 Crore folios in India. However, even that is not a very reliable barometer, since the same investors can have multiple folios. In fact, if you distil this number further based on unique PAN numbers, then there are only 4.2 Crore unique investors in mutual. That is very small if you consider that India has about 110 Crore mobile phone connections, over 70 Crore OTT watchers and about 65 Crore bank accounts. It is in this context that the 4.2 Crore unique mutual fund investors that really matters.

MF Folios: Macro picture for February 2024

How does the macro picture for February 2024 for mutual fund folios look like across open-ended and close-ended funds?

Macro picture	Total Folios Feb-24	Total Folios Feb-23	Folio Growth
Open ended Funds	17,36,21,491	14,37,31,714	20.80%
Closed Ended and Interval Funds	5,74,044	5,19,042	10.60%
Grand Total	17,41,95,535	14,42,50,756	20.76%

Data Source: AMFI

At a macro level, the total number of mutual fund folios as of February 2024 stood at 17.42 Crore folios; compared to 16.96 Crore folios in January 2024, 16.48 Crore folios in December 2023, and 16.18 Crore folios in November 2023. On a yoy basis, over January 2023, total folios are up at a robust 20.76% overall, which is better than 18.70% in January 2024, 16.84% in December 2023, and 15.78% in November 2023. Improvement is consistent.

In short, the ratio yoy folio accretion has been consistently improving over last 4 months. In the last few months, even the closed ended folios have shown growth on a yoy basis to the tune of 10.6% and that is due to surge in demand for fixed term plans (FTP). Now, FTPs are a good strategy to lock in higher yields when yields are expected to trend lower. However, the close-ended folios are just about 0.33% of total mutual fund folios.

Debt fund folios fall to a lesser extent in February 2024

Debt fund folios were under pressure in recent months. After 5 months of positive yoy folio growth, December 2023 had seen negative folio growth of -0.10%. The contraction in folios  accentuated in January 2024 to -0.29%, but improved to -0.26% in February 2024. Prior to November, debt fund folios growth had been 0.59% in November, and 0.72% in October 2023. The negative folio growth shows more of folio consolidation in the debt funds.

Active Debt Funds	Total Folios Feb-24	Total Folios Feb-23	Folio Growth
Overnight Fund	8,92,025	6,28,847	41.85%
Long Duration Fund	50,699	40,448	25.34%
Gilt Fund	1,82,215	1,71,155	6.46%
Money Market Fund	4,33,052	4,27,033	1.41%
Dynamic Bond Fund	2,19,929	2,20,176	-0.11%
Liquid Fund	17,78,681	17,86,569	-0.44%
Ultra Short Duration Fund	6,35,543	6,42,322	-1.06%
Medium to Long Duration Fund	1,01,160	1,06,466	-4.98%
Corporate Bond Fund	5,62,839	6,08,447	-7.50%
Low Duration Fund	8,83,315	9,55,013	-7.51%
Medium Duration Fund	2,31,903	2,52,439	-8.14%
Gilt Fund with 10 year duration	38,317	41,728	-8.17%
Floater Fund	2,17,967	2,41,031	-9.57%
Short Duration Fund	4,57,312	5,07,846	-9.95%
Banking and PSU Fund	2,59,627	2,98,204	-12.94%
Credit Risk Fund	2,11,281	2,47,040	-14.47%
Sub Total – Active Debt Funds	71,55,865	71,74,764	-0.26%

Data Source: AMFI

What are the key takeaways from a yoy comparison of debt fund folios as of February 2024. Out of the 16 categories of debt funds available in India as per AMFI classification, only 4 categories showed at least 1% expansion in the number of folios, while 12 fund categories saw contraction in folios. The ratio of contracting folios to expanding folios had been static at 9:7 for 6 months up to November 2023. However, in December 2023 and January 2024, this ratio has worsened to 10:6; and in February 2024 it weakened to 12:4. That means; the undertone continues to weaken in February 2024. The leader of the pack was Overnight fund folios, which grew 41.85% yoy, on a relatively large base. Long Duration Funds grew folios at 25.34%, albeit on a smaller base. Most longer duration debt funds saw persistent contraction in folios.

Were there the standard suspects putting pressure on folio growth among debt funds? Contraction in folios was pronounced across credit risk funds, banking & PSU funds, short duration funds, floater funds and gilt funds with 10-year duration. If you look at the folios story, there appears to be a general aversion for longer term bond funds and also for any sort of allocation discretion. With liquidity tightness causing short term yields to stay high, there is a lot of focus at the short end of the yield curve.

Equity funds added 2.28 Crore folios in latest year

In contrast to debt funds, there was little ambivalence in the growth of equity fund folios in February 2024 as they added 2.28 Crore folios in the year, across categories. For equity funds, macro level folio expansion improved further to 23.50% in February 2024; compared to 21.06% in January 2024, 19.02% in December 2023, 17.76% in November 2023, and 16.78% in October 2023. Equity fund folios accretion was the big story in February 2024.

Active Equity Funds	Total Folios Feb-24	Total Folios Feb-23	Folio Growth
Small Cap Fund	1,86,64,893	1,06,71,838	74.90%
Multi Cap Fund	58,68,656	40,75,693	43.99%
Dividend Yield Fund	8,55,919	5,96,908	43.39%
Sectoral/Thematic Funds	1,74,30,950	1,31,18,546	32.87%
Mid Cap Fund	1,37,15,842	1,04,99,596	30.63%
Value Fund/Contra Fund	60,07,105	46,02,572	30.52%
Large & Mid Cap Fund	91,05,807	77,48,622	17.52%
Flexi Cap Fund	1,40,02,857	1,26,64,386	10.57%
ELSS	1,58,60,893	1,49,68,197	5.96%
Large Cap Fund	1,34,89,341	1,29,63,430	4.06%
Focused Fund	50,75,441	53,21,370	-4.62%
Sub Total – Active Equity Funds	12,00,77,704	9,72,31,158	23.50%

Data Source: AMFI

In February 2024, 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 91%; the same as last 3 months. The only equity fund category to see contraction in folios in February 2024 was focused funds, with folios shrinking by -4.62%. As usual, small cap funds and multi-cap funds were the best performer in the folio growth category. This points to a dichotomy, since flexi-cap funds were supposed to be a more lenient and flexible version of multi-cap funds.

The big growth stories in terms of equity fund folios were small cap funds at 74.90%, Multi-Cap funds at 43.99%, Dividend Yield funds at 43.39%, Sectoral / Thematic funds at 32.87%, mid-cap funds at 30.63%, and Value / Contra funds at 30.52%. There are two trends here. With the rising valuations of mid and small cap funds, retail preference for large cap funds appears to be building. Interestingly, the small caps continue to be the quickest grower, despite the net flows into small cap funds being lower than last time. Also, the dichotomy of multi-cap funds and flexi-cap funds underlines that retail investors would prefer allocation focus in combination funds and rule-based asset allocation funds rather than offering discretion to the fund manager. However, alpha appears to be the name of the game in small and mid-cap funds; although preference for Beta is also showing up this month. Equity fund folios growth at 23.50% in February 2024 is an indication that the growth in the AUM is happening with the backing of folio growth.

Hybrid folio growth dominated by multi asset funds in February

Here we have combined hybrid funds with solution-based funds to give a realistic picture of hybrids. Folios have grown across categories, and again in February, hybrid funds showed 100% strike rate of folio growth. Arbitrage Funds witnessed positive folio traction in February 2024; for the second month in a row. However, the big story of February 2024 was how the preference was for asset allocation products.

Hybrid / Solution Funds	Total Folios Feb-24	Total Folios Feb-23	Folio Growth
Multi Asset Allocation Fund	19,30,545	10,31,458	87.17%
Equity Savings Fund	4,01,223	3,63,214	10.46%
Arbitrage Fund	4,82,770	4,58,666	5.26%
Retirement Fund	28,57,232	27,53,542	3.77%
Conservative Hybrid Fund	5,35,328	5,18,630	3.22%
Dynamic Asset Allocation/BAF	45,64,056	44,45,077	2.68%
Childrens Fund	29,76,977	29,24,260	1.80%
Aggressive Hybrid Funds	53,85,542	53,16,109	1.31%
Sub Total – Hybrid Funds	1,91,33,673	1,78,10,956	7.43%

Data Source: AMFI

Out of the 8 categories of hybrid and solution-based funds available in India as per the AMFI classification, all 8 categories saw folio expansion in the month of February 2024. The best folio growth was seen, as usual, in multi asset allocation funds at 87.17% and this comes on a fairly high base. The other segment of equity savings funds also saw investors growing folios by 10.46% yoy. Investors are now looking at select hybrids for better asset allocation and are also open to more debt in the portfolio. If you look at the two categories of funds with the best folio growth in February 2024; both are asset allocation funds. Investors are showing a preference for a rule-based asset allocation approach, as well as a combination of equity, debt, commodities, and derivative asset classes for a much wider palate.

Other than the multi asset allocation fund and the equity savings funds, all the other categories of hybrids only showed single digit growth. The big news was the return of arbitrage funds to positive growth as we see the category spreading across more investors. Balanced Advantage Funds (BAFs), which enjoyed the highest AUM among hybrid funds, faltered in folio growth, in the absence of NFOs. For the hybrid category of funds, number of folios grew by 7.43% in February 2024; compared to 6.61% in January 2024, 5.45% in December 2023, and 5.01% in November 2023. The growth momentum of folios has shown a marked and steady improvement over the last few months.

Passive funds continue their 100% strike rate

Passive funds may not have set the markets on fire in terms of AUM growth, but in terms of yoy folio growth, then continue to even beat equity funds in February 2024. Under passive category, we have included equity and debt related index products, apart from gold funds and Fund of Funds (FOF). These are passive products or benchmarked products; but the intent is to mirror the underlying asset class, rather than look for alpha. The focus of these passive fund managers is purely on minimizing tracking error. Even though passive fund AUMs tapered in recent months, folios are sharply higher yoy, showing better spread.

Passive Funds	Total Folios Feb-24	Total Folios Feb-23	Folio Growth
Index Funds	72,14,044	35,82,822	101.35%
Fund of funds investing overseas	15,51,981	12,74,592	21.76%
Other ETFs	1,34,64,269	1,19,63,506	12.54%
GOLD ETF	50,23,955	46,93,916	7.03%
Sub Total – Passive Funds	2,72,54,249	2,15,14,836	26.68%

Data Source: AMFI

Other than hybrid funds, even passive funds saw expansion in the number of folios across all the categories. Passive fund folios gained in the last one year from targeted NFOs and a preference for beta over alpha; on the equity and debt side. However, last few months had seen some abatement in interest in such index stories. Index funds dominated the folio growth at 101.35% followed by international ETFs at 21.76%. Index ETFs and Gold ETFs followed behind with 12.54% and 7.03% folio growth respectively.

Passive fund folio growth, on yoy basis, improved to 26.68% in February 2024; compared to 24.73% in January 2024; 22.47% in December; 21.23% in and November; and 19.40% in October 2023. To cut a long story short, folio growth continues to remind us that Indian equity markets are becoming inclusive and this includes the passive fund story also. Folio growth may not be precise but it is a good approximation of retail participation and intensity in the mutual fund market. The beauty of folio growth that it is not about big investors; but about the financial inclusion of millions of small investors. For the mutual funds to grow structurally, this distinction is really important!