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

9 Feb 2024 , 07:35 AM

Fund AUM versus Fund folios

In January 2024, we saw robust flows into mutual funds across all categories. Out of the ₹1.23 Trillion of net flows into mutual funds in Jan-24, nearly 62% was accounted for by debt fund inflows, while active equity funds, passive funds and hybrid funds accounted for a combined 38%. Debt fund flows tend to be volatile due to treasury flows, but sharply lower fiscal deficit pencilled in Interim Budget 2024 could revive interest in long-term debt funds. 

However, AUM has two clear shortcomings as a measure of investor participation. AUM does not distinguish between bulk flows and retail flows and only gives an overall picture. That makes the measure too generic and at best of optical value. Secondly, the AUM includes flows and value accretion due to index ascent. In contrast, the number of folios is a better barometer of retail participation and also of flow accretion via customer addition.

Why the focus on Mutual Fund folios?

There is a reason we focus on folios. It is all well and good to pat ourselves on the back for the growth in AUM, but the AUMs can be both enticing and misleading in a bull market. That is where SIP numbers are more relevant. Unlike the growth in AUM, which can be influenced by institutions or HNIs; folio growth is a better measure of retail participation. In last 3 years, the surge in mutual fund folios has been led by the tech savvy Gen-X and Gen-Z investors. Such trends can be deciphered only when you look at folio growth on a rolling basis, which is why we look at folio growth each month. 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 January 2024

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

Macro picture	Total Folios Jan-24	Total Folios Jan-23	Folio Growth
Open ended Funds	16,89,77,923	14,23,29,455	18.72%
Closed Ended and Interval Funds	5,81,259	5,14,187	13.04%
Grand Total	16,95,59,182	14,28,43,642	18.70%

Data Source: AMFI 

At a macro level, the total number of mutual fund folios as of January 2024 stood at 16.96 crore folios compared to 16.48 crore folios in December, 16.18 crore folios in November, and 15.96 crore folios in October 2023. On a yoy basis, over January 2023, total folios are up 18.70% overall, which is better than 16.84% yoy folio growth in December, 15.78% in November, and 14.79% in October 2023. 

In short, the ratio has been consistently improving over the last 4 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). Now, FTPs are a good strategy to lock in higher yields when yields are likely to trend lower. However, despite this positive picture, the close-ended folios are paltry and account for just 0.34% of total mutual fund folios.

Debt fund folios fall sharper in January 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%. Prior to November, debt fund folios growth had been 0.59% in November, and 0.72% in October 2023. Incidentally, December 2023 was the first month of folio contraction since June 2023. 

Active Debt Funds	Total Folios Jan-24	Total Folios Jan-23	Folio Growth
Overnight Fund	8,60,396	6,23,131	38.08%
Liquid Fund	48,073	39,497	21.71%
Ultra Short Duration Fund	1,79,926	1,70,646	5.44%
Low Duration Fund	4,38,028	4,28,094	2.32%
Money Market Fund	2,20,330	2,19,116	0.55%
Short Duration Fund	17,84,696	17,81,851	0.16%
Medium Duration Fund	6,39,365	6,44,605	-0.81%
Medium to Long Duration Fund	1,01,729	1,06,677	-4.64%
Long Duration Fund	5,69,907	6,11,046	-6.73%
Dynamic Bond Fund	2,35,134	2,53,176	-7.13%
Corporate Bond Fund	8,92,255	9,64,472	-7.49%
Credit Risk Fund	38,720	41,972	-7.75%
Banking and PSU Fund	2,20,693	2,43,940	-9.53%
Gilt Fund	4,61,888	5,11,060	-9.62%
Gilt Fund with 10 year constant duration	2,62,869	3,00,675	-12.57%
Floater Fund	2,14,675	2,49,244	-13.87%
Total	71,68,684	71,89,202	-0.29%

Data Source: AMFI

What are the key takeaways from a yoy comparison of debt fund folios as of January 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 10 fund categories saw contraction in folios and two categories were flat. Money Market funds and short duration funds grew folios at less than 1%. The ratio of contracting folios to expanding folios had been static at 9:7 for 6 months leading up to November 2023. However, in December 2023 and January 2024, this ratio has worsened to 10:6. That means; the undertone continues to weaken in January 2024. The leader of the pack was Overnight fund folios, which grew 38.08% yoy, on a relatively large base. Liquid funds grew folios at 21.71%, 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 floater funds, gilt funds with 10-year duration, regular gilt funds, banking & PSU funds, credit risk funds, corporate bond funds and dynamic bond funds. 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 shorter term yields staying elevated compared to longer term yields, this preference for the shorter end of the yield curve may just about continue. 

Equity funds added 2.03 crore folios in last 1 year

In contrast to debt funds, there was little ambivalence in the growth of equity fund folios in January 2024 as they added 2.03 crore folios last year, across categories. For equity funds, macro level folio expansion improved further to 21.06% in January; compared to 19.02% in December, 17.76% in November, 16.78% in October 2023, and 15.75% in September 2023. Equity fund folios accretion has been the big story in the month of January 2024.

Active Equity Funds	Total Folios Jan-24	Total Folios Jan-23	Folio Growth
Multi Cap Fund	1,78,96,929	1,04,30,356	71.59%
Large Cap Fund	56,27,683	39,22,006	43.49%
Large & Mid Cap Fund	8,36,896	5,94,130	40.86%
Mid Cap Fund	58,24,994	45,35,765	28.42%
Small Cap Fund	1,33,16,071	1,03,69,025	28.42%
Dividend Yield Fund	1,61,37,536	1,29,94,142	24.19%
Value Fund/Contra Fund	88,80,611	76,75,827	15.70%
Focused Fund	1,37,76,248	1,25,87,368	9.45%
Sectoral/Thematic Funds	1,57,28,518	1,48,30,370	6.06%
ELSS	1,33,46,810	1,29,45,224	3.10%
Flexi Cap Fund	50,93,488	53,22,806	-4.31%
Total	11,64,65,784	9,62,07,019	21.06%

Data Source: AMFI

In January 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 month. The only equity fund category to see contraction in folios in January 2024 was flexi-cap funds, with folios shrinking by -4.31%. Ironically, multi-cap funds were the best performer in the folio growth category. This clearly points to a dichotomy, since flexi-cap 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 multi-cap funds at 71.59%, Large cap funds at 43.49%, large & mid-cap funds at 40.86%, mid-cap funds at 28.42%, small cap funds at 28.41%, and dividend yield funds at 24.19%. 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. Also, the dichotomy of multi-cap funds and flexi-cap funds underlines that retail investors would prefer allocation focus in combination 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. There appears to be a greater openness now to include large cap funds in the portfolio, apparently due to these stocks being optically attractively valued. Equity fund folios growth at 21.06% in January 2024 is an indication that the growth in the AUM is happening with the salutary backing of folio growth too.

Hybrid folio growth dominated by traditional hybrids in Jan-24

Here we have combined hybrid funds with solution-based funds to give a realistic picture of hybrids. Folios have grown across categories, and this time the hybrid funds have shown 100% strike rate of folio growth. Arbitrage Funds, which saw sustained negative folio growth in previous months, saw positive folio traction in January 2024. However, the big story of January 2024 was the return of the conservative and traditional hybrid funds.

Hybrid / Solution Funds	Total Folios Jan-24	Total Folios Jan-23	Folio Growth
Conservative Hybrid Fund	18,22,102	10,05,254	81.26%
Aggressive Hybrid Fund	3,95,788	3,63,281	8.95%
Dynamic Asset Allocation / BAF	28,48,950	27,47,498	3.69%
Multi Asset Allocation Fund	4,78,260	4,62,351	3.44%
Arbitrage Fund	5,34,546	5,19,088	2.98%
Equity Savings Fund	45,15,525	44,33,648	1.85%
Retirement Fund	29,70,835	29,20,516	1.72%
Childrens Fund	53,65,185	53,06,549	1.10%
Total	1,89,31,191	1,77,58,185	6.61%

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. The best folio growth was seen in conservative hybrid funds at 81.26% and this comes on a fairly high base. Investors are now looking at select hybrids for better asset allocation and are also open to more debt in the portfolio. Investors appear to be moving away from the recent predilection of equities and that is positive as it offers a positive asset allocation tinge to retail portfolios. Traditional categories like aggressive hybrid funds were the other big gaining category at 8.95% growth in folios in the month of January 2024.

Surprisingly, the growth in folios of multi-asset allocation funds have been tepid in this month, despite a surge in NFOs this month. But, the base has already grown substantially in the last few months, so any positive growth from here is good news. Investors are looking to auto hedge risks by spreading across asset classes and here you get multiple asset classes with the benefit of allocation. For the hybrid category of funds, number of folios grew by 6.61% overall in January 2024; compared to 5.45% in December, 5.01% in November, and 4.33% in October 2023. Momentum is definitely 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). 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.

Passive Funds	Total Folios Jan-24	Total Folios Jan-23	Folio Growth
Index Funds	67,02,645	33,89,328	97.76%
GOLD ETF	15,56,656	12,57,035	23.84%
Other ETFs	1,31,80,494	1,18,54,687	11.18%
Fund of funds investing overseas	49,72,469	46,73,999	6.39%
Total	2,64,12,264	2,11,75,049	24.73%

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 passive products; on the equity and debt side. Index funds dominated the folio growth at 97.76% followed by gold ETFs at 23.84%. Index ETFs and international fund of funds (FOF) followed behind with 11.18% and 6.39% folio growth respectively. 

Passive fund folio growth, on yoy basis, improved to 24.73% in January 2024; compared to 22.47% in December; 21.23% in November, 19.40% in October, 17.86% in September, 17.08% in August, 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. The beauty of folio growth that it is not about big investors; but about the financial inclusion of millions of small investors. That is what makes the mutual fund folio growth so significant.