It is said that past trends hold the key to the future. The Indian mutual fund industry has transformed remarkably in recent years. Retail investors have seen a significant upward trend in participation. For example, there was a 20% increase in assets under management in the mutual fund industry over one year, spanning December 2022 to November 2023.
This is just the tip of the iceberg. In this article, we will explore the future trends awaiting the mutual fund industry in India.
An Introduction to the Mutual Fund Industry in India
Starting as a trust under the Indian Trust Act of 1882, the mutual fund industry in India has undoubtedly traversed a long path. As you might already know, a mutual fund is a collective pool of funds contributed by many investors and managed by a professional fund manager.
The money collected by the fund managers is invested in financial instruments such as stocks and bonds, depending on the fund’s fund’s investment objectives. The gains incurred are distributed proportionately among the investors after deducting specific fees and levies.
The total number of mutual funds accounts (or folios) in India as of June 30, 2024, stood at 19.10 crore. Most folios were held in equity, hybrid, and solution-oriented schemes. Mutual fund investment in India has significantly increased in recent years.
According to the Association of Mutual Funds of India data, the mutual fund industry’s Assets Under Management (AUM) increased twofold between June 2019 and 2024.
The time taken to double the number of folios will be far less. Industry experts estimate that the number of folios will double to 20 crore within 2024, pointing to three years for doubling the number from 10 crore.
Trends Observed in the Mutual Fund Industry in India
Let us now look at the recent trend in the mutual fund industry in India. The most significant trends are:
1. Resilience
The mutual fund industry in India has undergone significant transformations over the years. Resilience and adaptability have been the industry’s actual markers. Thanks to the recent increasing participation of retail investors, mutual funds in India have supported the growth of industries in more ways than one.
The continuous support of retail investors in the relatively challenging economic landscape amid the post-pandemic economic recovery has offered much-needed fuel to the Indian growth story.
2. Market Sentiment and AUM Trends
Leaving aside a few declining trends, the mutual fund industry in India has experienced a significant boom in recent years. The scenario was quite different until a few years ago, but the winds started to change towards the culmination of the twenty-first century’s second decade.
The mutual fund industry’s Assets Under Management (AUM) crossed sixty-one lakh crores in June 2024. This AUM has increased sixfold since 2014, when it reached Rs. 10 lakh crores.
Driven by an optimistic domestic economic outlook and robust macroeconomic indicators, positive sentiments among Indian investors have helped them navigate global uncertainties.
3. Sectoral Preferences
There has been a considerable focus on small-cap and mid-cap funds in the Indian capital markets, especially since the beginning of the Coronavirus pandemic. In terms of returns, they significantly outperformed the large-cap funds in this period.
Notably, in recent years, Indian investors have preferred equity schemes over their debt counterparts. For example, the volume of investments in Exchange Traded Funds (ETFs) increased by 70 basis points in one year between November 2022 and 2023, clearly indicating the rising preference of investors in India for this investment avenue.
4. Retail Participation and SIP Contribution
With the monthly SIP contributions touching an unprecedented high of Rs. 21260 crores in July 2024, Indian investors are poised to make the most of India’s growth story. Notably, the number of SIP accounts in India touched almost nine crores in the same month. The surge in SIP participation is a testimony to the rising participation of retail investors in the capital markets.
Moreover, the rapid growth of SIP subscriptions has assured the industry continuity and stability in fund flows. With the Government of India focused on attaining the status of a developed country by 2047, industrial activity can be expected to experience high growth. All these cues align perfectly for continuity in mutual fund investments.
5. New Fund Offer (NFO) and ETF Dynamics
New Fund Offers help fund houses raise funds for specific asset classes and sectors. The funds collected are used to purchase securities of publicly traded companies. Despite the high risks involved in most of these offers, investors in India have responded to these NFOs with a bumper response.
Investors prefer Exchange Traded Funds (ETFs) for their relatively lower expense ratios and lesser brokerages and commissions than individual stocks. An ETF is a basket of securities that trades on the securities just like regular stocks do.
The exchange-traded funds market has significantly evolved in the last few years. Some estimates state that exchange-traded funds now occupy one-sixth of India’s overall mutual fund investment pie. Already at a multiyear high, experts estimate that the ETF candle in India will continue to burn bright in the years to come.
6. Investor Participation
Retail investors’ participation in the mutual fund segment has increased significantly in recent years. Some estimates highlight that the average Indian has shifted her savings from the traditional instruments of Fixed Deposits (FDs) and Recurring Deposits (RDs) to mutual fund schemes.
Not only are these investors preferring equity schemes over their debt counterparts, but they are parking their funds for relatively longer durations. This contrasts sharply with non-retail investors, who usually invest their money for relatively shorter durations. This shift could indeed be a paradigmatic change that could fuel growth in the Indian mutual fund industry in the future.
Conclusion
Moving into the future, the mutual fund industry in India is positioned for robust growth as Indian households continue to divert their savings from traditional financial instruments to mutual fund investments, which can be expected to swell. As financial awareness among the commoners increases, one can expect an unprecedented boom, a boom that can be difficult for analysts to estimate currently.
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