That India’s mutual fund industry is becoming a formidable force in the Indian capital markets is hardly a secret. The hiccups of the past few years, including slowing economic growth and Covid-related lockdowns, paycuts and job losses, have hardly deterred the sector, which showed extraordinary growth.
The total quarterly average assets under management (AUM) of the mutual fund industry has more than quintupled in the last 10 years. It has grown to over Rs 38.22 lakh crore, a compounded annual growth rate (CAGR) of 18.84 per cent, as on December 31, 2021, according to December 2011-2021 data from the Association of Mutual Funds in India. And there’s still room to grow.
When I last curated the OLM 50 list of recommended mutual funds for Outlook Money in January 2015, the industry was managing assets worth merely Rs 10.51 lakh crore. The going has been strong ever since and the number of schemes has been rationalised to about 1,500.
The Growth Story
First, deeper penetration of financial products and the flexibility that mutual funds offer have given a boost. With a wide array of schemes to choose from, mutual funds cater to the varying needs of the salaried class, corporate honchos, high net-worth individuals, and even the super-rich.
Even at the lower end of the spectrum, mutual funds have seen stupendous growth. India has a low 27 per cent financial literacy rate, according to the National Financial Literacy and Inclusion Survey, 2019. But financial awareness programmes such as Amfi’s Mutual Funds Sahi Hai have played a huge role in spearheading the growth. In fact, mutual funds have gone from being a high-end intricate product only the financially savvy understood to becoming a mass product.
Second, much of the foundation for growth was laid in the last decade, a crucial phase when the sector got its act together in terms of transparency and distribution. In fact, in the last decade, the sector took several measures to democratise mutual funds. In 2012, it started enrolling distributors across the length and breadth of the country, taking mutual funds to smaller cities and towns. Another fillip came when mutual funds were included on stock exchanges. From 2013, mutual fund distributors were allowed to use recognised stock exchanges to buy and redeem funds on behalf of clients. Also, direct investment was allowed in 2013 to tap financially savvy do-it-yourself investors.
With mobile-based apps, penetration deepened. As more people went online, distributors serviced clients better; and took on more business, even with small amounts. Around 2013, the Securities and Exchange Board of India ushered in regulations, mandating funds to label their debt schemes’ maturities as short, medium, and long term.
Third, the corpus of several funds has increased manifold, particularly of large equity funds, but fund houses have used technology to scale up. Fund houses have also introduced systems and processes to manage the finer parts of a portfolio, including strategies about which scrips and investments to include in a portfolio. This has allowed them to easily scale their corpuses. Over the past few years, fund houses that started small are competing with the large ones.
Long Way Ahead
When some of these regulations were being introduced, the apprehension was that growth rates would taper as the sector was heavily reliant on traditional distributors. However, detractors have been proved wrong.
With increasing financial literacy and mobile technology platforms, the participation of individuals in financial products is only likely to increase. The low financial literacy rates indicate the vast potential. Increasing income levels and digitisation are playing important roles in reducing the cost of reaching smaller markets and investors.
In fact, with flexibility and transparency, mutual funds will become one of the most important tools in an individual’s financial journey, probably more ubiquitous than bank fixed deposits. Besides, the mutual fund sector’s 15 per cent AUM-to-GDP ratio is much lower than the 75 per cent world average. The ratio of equity mutual funds-to-GDP is even lower, at 6 per cent. If India’s mutual funds have to narrow this gap, with the economy on course to reach the magic number of $5 trillion, they have barely scratched the surface.
OLM 50 is a helping hand for investors who want to join in or are looking for course correction in their portfolios.