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

13 Nov 2023 , 06:57 AM

The month of October 2023 was again a month of record SIP flows, with gross SIP flows touching an all-time high of Rs16,928 crore for the first time ever. That is a growth of 5.52% on a MOM basis. The SIP stoppage ratio has actually toned down in the last few months and that is the good news and magnifies the SIP impact. In the month of October, the fresh flows into mutual funds were triggered largely by SIP flows and to a lesser extent by NFO flows. Overall flows into mutual funds in October 2023 were above Rs80,000 crore with debt funds making the bulk of the positive contribution. The challenge is that all these flows do not provide a very lucid and unequivocal picture of retail participation. A more foolproof and credible mechanism of judging retail participation in mutual funds is rate of folio growth. Let us spend a moment on understanding what folios are about and why folio growth matters.

Mutual Fund Folios are unique investor accounts with a particular asset management company (AMC). If you are investing with 6 different funds, you have at least 6 folios. Unique folios are not unique investors, but they give a reliable picture. Even if you factor in the risk of multiple folios, the folio growth or the account growth offers a better picture of retail spread and the retail intensity of mutual fund flows, as compared to the rupee flows, which is skewed towards large HNI flows and institutional flows. Folios do not change much in a short span of time, but if you look at folios over a 1 year period (yoy basis), it gives a rather incisive picture of how folios have grown; apart from valuable insights into trends in retail behaviour. Here we look at how the mutual fund folios grew across categories of mutual funds between October 2022 and October 2023. 

MF Folios: Macro picture for October 2023

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

Macro picture	Total Folios Oct-23	Total Folios Oct-22	Folio Growth
Open ended Funds	15,90,37,754	13,85,88,956	14.75%
Closed Ended and Interval Funds	6,09,036	4,88,789	24.60%
Grand Total	15,96,46,790	13,90,77,745	14.79%

Data Source: AMFI 

At a macro level, the total number of mutual fund folios as of October 2023 stood at 15.96 crore folios, compared to 15.71 crore folios last month. On a yoy basis over October 2022, total folios are up 14.79% overall, which is better than the growth seen in September 2023, August 2023, and July 2023. In the last few months, even the closed ended folios have shown growth on a yoy basis and that is largely due to the surge in demand for fixed term plans (FTP). Now FTPs are a very good strategy to lock in higher yields when yields are expected reverse downwards, sooner rather than later. However, despite this positive picture, the close-ended folios account for just about 0.38% of the total mutual fund folios in India.

Debt fund folios grow marginally in October 2023

Debt fund folios had been under a lot of pressure in recent months, but October 2023 marked the fourth month in succession of positive growth in the number of debt fund folios. The increase of 0.72% on a yoy basis was nothing worth trumpeting about, but it is good to see positive folios growth after more than a year of negative folio growth. Since July 2023 there has been consistent accretion in debt fund folios on a year-on-year basis.

Macro picture	Total Folios Oct-23	Total Folios Oct-22	Folio Growth
Long Duration Fund	47,276	26,248	80.11%
Overnight Fund	8,10,709	6,16,496	31.50%
Gilt Fund	1,80,231	1,70,202	5.89%
Money Market Fund	4,40,649	4,20,525	4.79%
Dynamic Bond Fund	2,25,769	2,17,337	3.88%
Ultra Short Duration Fund	6,42,181	6,23,263	3.04%
Liquid Fund	17,88,040	17,57,482	1.74%
Medium to Long Duration Fund	1,04,197	1,07,949	-3.48%
Medium Duration Fund	2,44,807	2,57,213	-4.82%
Corporate Bond Fund	5,98,670	6,29,312	-4.87%
Low Duration Fund	9,12,380	9,80,104	-6.91%
Gilt Fund with 10 year constant duration	40,273	43,302	-7.00%
Short Duration Fund	4,83,490	5,25,948	-8.07%
Floater Fund	2,26,798	2,46,784	-8.10%
Credit Risk Fund	2,24,249	2,55,956	-12.39%
Banking and PSU Fund	2,70,881	3,10,655	-12.80%
Total of Debt Funds	72,40,600	71,88,776	0.72%

Data Source: AMFI

What are the key takeaways from a yoy comparison of debt fund folios as of October 2023. Out of the 16 categories of debt funds available in India as per AMFI classification, 7 categories showed at least 1% expansion in the number of folios, while the other 9 fund categories saw contraction in folios. The ratio of contracting folios to expanding folios has been static for the large 5 months at 9:7. That means; the undertone is still weak. The leader of the pack was Long duration fund folios, which grew 80.11% yoy, albeit on a relatively small base. However, overnight funds grew folios at 31.50%, 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. This is, perhaps, an indication that investors are willing to take long term bets that rates would either stabilize or move lower.

How has the RBI holding status quo on rates since February impacted the nature of folio shift in debt funds? In October, the RBI had paused for the fourth time in a row since April 2023. The RBI decision to hold rates in April, June, August, and October 2023 has ratified the perception that; markets are either at the peak or close to peak rates. The standard suspects in the negative folio growth among debt funds were categories like credit risk funds, banking & PSU funds, floater funds and short duration funds. Folio growth has been negative where there is asset quality risk or where there is too much managerial discretion, or like in floater funds, where there is a mismatch with the expectation on interest rate direction. Debt fund folios in October 2023 expanded by 0.72% compared to 0.76% in September 2023. Previously, overall folios in debt funds had expanded by 0.50% in August 2023 and 0.17% in July 2023. Prior to July 2023, the debt fund folio growth overall was consistently in the negative zone.

Equity fund folios witness sharp growth in October 2023

In contrast to debt funds, there was no ambivalence in the growth of equity fund folios in October 2023. In the case of equity funds, the macro level folio expansion improved to further to 16.78% in October 2023; compared to 15.75% in September 2023, 15.01% in August 2023, 13.66% in July 2023, 12.71% in June 2023, and 12.34% in May 2023. October 2023 marks one of the best stories in equity fund folios accretion on yoy basis.

Macro picture	Total Folios Oct-23	Total Folios Oct-22	Folio Growth
Small Cap Fund	1,53,46,265	95,03,255	61.48%
Multi Cap Fund	50,21,790	36,76,860	36.58%
Dividend Yield Fund	7,96,208	5,91,282	34.66%
Mid Cap Fund	1,22,44,014	98,25,553	24.61%
Value Fund/Contra Fund	54,16,399	43,49,373	24.53%
Sectoral/Thematic Funds	1,46,31,293	1,27,14,127	15.08%
Large & Mid Cap Fund	84,14,596	74,30,902	13.24%
ELSS	1,54,71,152	1,44,29,533	7.22%
Flexi Cap Fund	1,32,64,789	1,24,86,070	6.24%
Large Cap Fund	1,31,20,371	1,28,88,577	1.80%
Focused Fund	51,47,044	53,38,157	-3.58%
Total of Equity Funds	10,88,73,921	9,32,33,689	16.78%

Data Source: AMFI

In October 2023, a total of 10 out of the 11 categories of equity funds as per AMFI classification saw accretion in folios. That is 91% strike rate. This has been the consistent position for the last 3 months in a row. The only fund category to see contraction in folios in October 2023 was Focused Funds, with folios shrinking by -3.58%. This is more due to base effect and absence of NFOs. Small cap funds continue to op the folios growth at 61.48%, despite few NFOs, as there is a retail rush for such alpha generating funds. Investors have not been too perturbed by certain small cap funds freezing fresh inflows. Apart from small cap funds, other sectoral and alpha bets have also seen traction in terms of folio growth.

Oher growth stories in terms of equity fund folios were multi-cap funds at 36.58%, dividend yield funds at 34.66%, mid-cap funds at 24.61%, and value / contra funds at 24.53%. The rankings on folios growth are almost the same as previous months, barring some minor changes. There are two shifts visible. Large cap folio growth appears to be facing stiff competition from the passive index funds and index ETFs. It is the alpha intensive funds like small cap funds, dividend yield funds and mid-cap funds that are attracting interest. The other shift is from flexi cap funds to multi-cap funds and the trend is surprising as fund managers had argued that flexibility in allocation was inevitable. Ironically, investors are preferring a more structured approach. Equity fund folios in October 2023 give a strong hint of a surge in retail participation. 

Hybrid folio growth dominated by multi-asset allocation funds

Here we have combined hybrid funds with solution-based funds to give a more realistic picture of hybrids. Folios have grown across categories, except arbitrage funds and dynamic asset allocation funds (BAFs). Arbitrage Funds attracted maximum flows but folios growth has been negative, showing that few customers are consolidating their exposures. 

Macro picture	Total Folios Oct-23	Total Folios Oct-22	Folio Growth
Multi Asset Allocation Fund	14,69,736	8,47,730	73.37%
Equity Savings Fund	3,80,418	3,65,445	4.10%
Retirement Fund	28,24,070	27,25,635	3.61%
Conservative Hybrid Fund	5,32,260	5,17,512	2.85%
Aggressive Hybrid Fund	53,49,511	52,66,180	1.58%
Childrens Fund	29,49,631	29,09,230	1.39%
Dynamic Asset Allocation / BAF	43,65,084	44,50,929	-1.93%
Arbitrage Fund	4,55,636	4,83,889	-5.84%
Total of Hybrid Funds	1,83,26,346	1,75,66,550	4.33%

Data Source: AMFI

Out of the 8 categories of hybrid and solution-based funds available in India as per the AMFI classification, 6 categories saw folio expansion. Arbitrage funds saw contraction of -5.84% in folios (slightly better than in September). Even Dynamic Asset Allocation Funds (BAFs) saw contraction of -1.93% in October 2023 due to high base. In recent months, the big folio growth leader has been multi-asset allocation funds; despite the base having grown now. This is largely driven by NFOs; and in October 2023. The recent report that the ICICI Pru Multi Asset Allocation Fund had converted Rs10 lakhs into Rs5.50 crore in 20 years is only going to help the aura around these multi-asset allocation funds.

The 73.37% 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 this is the best answer. All other categories saw single-digit growth in folios. For the hybrid category of funds, number of folios grew by 4.33% in October 2023; compared to 3.67% in September 2023, 2.74% in August 2023, 3.3% in July and June 2023, 3.65% in May 2023, and 4.23% in April 2023. The momentum remains positive for hybrid funds; and that is the good news.

Passive fund folios are still showing top class 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 the same. The focus of these passive funds is more on minimizing tracking error. 

Macro picture	Total Folios Oct-23	Total Folios Oct-22	Folio Growth
Index Funds	56,91,078	29,98,216	89.82%
Fund of funds investing overseas	14,48,216	12,54,452	15.45%
Other ETFs	1,26,23,786	1,16,68,143	8.19%
GOLD ETF	48,33,807	46,79,130	3.31%
Grand Total	2,45,96,887	2,05,99,941	19.40%

Data Source: AMFI

Passive funds are the only category where all the categories saw expansion in the number of folios. Passive fund folios gained from targeted NFOs and a preference for passive products; on the equity and debt side. Index funds dominated the folio growth at 89.82% followed by FOFs at 15.45%. Index ETFs and gold ETF followed behind with single-digit folio growth. Passive fund folio growth improved to 19.40% in October 2023; compared to 17.86% in September 2023, 17.08% in August 2023, 14.79% in July 2023, and 13.08% in June 2023. Folio growth continues to remind us that Indian equity markets are becoming inclusive.