Key mutual fund trends observed in September 2023

18 Oct 2023 , 01:25 PM

As of the close of September 20123, the average AUM stood at Rs47.79 trillion. SIP flows in July 2023 had crossed Rs15,000 crore and in just 2 months frame, the total SIP flows touched Rs16,042 crore in September 2023. September 2023 was also a strong month in terms of NFO (new fund offering) flows at over Rs7,795 crore, but was largely dominated by the multi-asset allocation funds, a type of hybrid fund.

As is the general practice, the Association of Mutual Funds of India (AMFI) has just released its monthly report on the key trends in mutual funds based on industry level data. These trends for September 2023 pertain to overall AUM of mutual funds, the mix and colour of the AUM and also the mix of the nature of investors. The AMFI report also provides value added analytics like ageing of equity fund investments and average holding period. One of the biggest trends we saw in mutual fund flows this month was the rise of hybrid funds.

Key Trends in Mutual Funds – Segment level (September 2023)

Mutual fund segment level trends for September 2023 are confined to a macro level and have more to do with the colour and direction of the flows into different fund classes.

• Average assets under management (AAUM) of all mutual fund schemes combined, touched a life-time high of Rs47.79 trillion as of the close of September 2023. That translates into dollar AUM of $574 billion. Compared to August, 2023, the AUM growth in September has been strong but dollar AUM growth has been tepid due to weakening rupee. On a yoy basis, the mutual fund AUM has grown by 19.83% compared to September 2022. That was partially due to inflows and partially due to Nifty rally.

   

• In the last couple of years, we have seen a gradual shift in the overall AUM mix from active debt to active equity. In September, the trend just got accentuated due to heavy selling in debt fund. Debt fund outflows and strong equity fund inflows in August and September 2023, have underscored the equity fund domination. That is why, the share of active debt funds fell sharply from 19.9% to 18.8% YOY, while it fell by 40 bps MOM. Between September 2022 and September 2023, the market share of equity oriented funds (including aggressive equity balanced) has gone up from 51.2% to 54.1% of the overall AUM mix. That is a huge shift for equity funds. Even on a sequential MOM basis, the share of equity funds is up 140 basis points.

   

• Over the last 1 year, the share of liquid funds in the overall AUM has fallen from 16.4% to 14.3%. The share is also down a whopping 110 bps on a MOM basis. While a large part of the liquid fund flows is treasury flows in nature, there is also a quiet bounce in demand for arbitrage funds as an alternative for liquid funds. Equity market volatility has led to arbitrage funds yielding higher returns in a more tax efficient manner. Passive funds, comprising of index funds, equity index ETFs, debt index ETFs and fund of funds (FOFs) have increased over the last one year from 12.5% to 12.7%. This is the fourth month in a row that the market share of passive funds has been below 13%.

   

• Are individual investors continuing to play a bigger role in mutual fund AUM as compared to institutional investors; as has been the trend in recent months? If you look at the AUM share, the answer is fairly unequivocal. The massive influx of the much savvier Gen-Z and millennial investors into mutual funds; combined with the rapid rise of SIPs, has catalysed a surge in the number of retail folios as well as the retail AUM in this period. In September 2023, gross SIP flows were at a record high of Rs16,042 crore. Between September 2022 and September 2023, the share of individuals in the overall AUM composition has gone up from 57.1% to 58.8%. Even on a MOM basis, the share of individuals in mutual fund AUM has increased by 100 bps; which is quite a lot. At the same time, the share of institutions and corporates in the overall mutual fund AUM has fallen from 42.9% to 41.2%. It is largely about the surge in equity valuation and SIPs.

   

• How much have individual investors allocated to each of the different categories of mutual funds like debt, equity, liquids, and ETFs? As of September 2023, individual investors have a share of just 40% in debt oriented schemes and 13% in short term money market schemes. These are largely treasury products, so that is understandable. However, individual investors have an imposing 89% share of equity fund AUM, but just about 10% of AUM of passive funds like equity and debt index funds as well as index ETFs. Retail investors are not leveraging passive products, but the good news is that the overall individual investor shares have remained constant in the last one year.

   

• Let us turn to the individual investor allocation basket. As of September 2023, individual investors have 82% of their mutual fund assets in equity schemes and 13% in active debt funds. Liquid funds at 3% and ETFs at 2% are fairly insignificant. On the other hand, institutional investors and corporates have 30% of their corpus in liquid funds, 28% in ETFs / FOFs, 27% in long period debt funds and 15% in active equity funds. The shift to equity funds by institutions is on higher valuations and the arbitrage fund demand.

As of the close of September 2023, overall assets of mutual funds in India have grown by 19.84% yoy. Assets of individual investors in this period grew by 23.51% while the assets of institutional investors grew by a less impressive 14.96%. However, this is more due to the predominance of individual investors in equity funds, where there is valuation edge.

Key trends in mutual funds – Folios and Ticket sizes (September 2023)

Folios are investor accounts unique to an AMC. They are a good proxy for retail appetite despite the fact that they are not exactly unique. Despite duplications, folios tell you which way the wind is blowing.

• There were total of 15.71 crore folios as of the close of September 2023 of which retail investors accounted for nearly 91.2% of the total folios. In addition, HNIs accounted for 8.2% of the folios while institutions accounted for the balance 0.6% of the total folios. These ratios have been static over last month. However, the retail share of folios comes down drastically when we look at active debt funds. Here, retail investors account for just 66.5% of the folios, while HNI investors account for 31.1% of the folios. HNIs also have a high share of folios of liquid funds (20.1%) and hybrid funds (22.6%); which are targeted principally at the savvy HNI investors.

   

• When we look at folios, the big story is the geometric growth in folios since the global financial crisis of 2008-09. Post the financial crisis, there was a 5 year phase when the folios compressed due to lacklustre interest post the financial crisis. Between March 2009 and September 2014, the number of mutual fund folios had actually contracted from 4.76 crore to 3.95 crore. However, between September 2014 and September 2023, the number of mutual fund folios have jumped sharply from 3.95 crore to 15.71 crore. That is a jump of 298% in folios since the year 2014. The impact on financialization of savings becomes apparent when you consider that the folios have grown in the last 9 years at a CAGR of 16.58%.

   

• There are two takeaways on folios and retail holding period. Firstly, average ticket size of retail investors in equity funds has been static MOM at Rs0.76 lakhs. But there is one more interesting takeaway, which beats popular logic. The general belief is that retail investors generally to be less patient about investments. However, the average folio holding data contradicts this theory. In fact, the retail investors do not take a myopic approach to equity funds. As per data of September 2023, retail investors hold nearly 51.4% of the equity fund assets for more than 2 years. This is up from just 43.7% in 2022. It clearly shows a lot more stickiness among retail investors and could be induced by the experience of the pandemic, when the investors who stuck on to SIPs, ended up making a lot of money when the economy recovered and set the tone for a long term bull market.

The positive takeaway is that retail investors are realizing the virtues of time over timing in the market. In the long run, it is not just enough to invest, but more important to be patient. As a result, retail investors are becoming more patient with equity funds and taking wealth creation and financial planning more seriously. Long term wealth creation is for the investors who let compounding happen; without worrying about the noise.

Key trends in mutual funds – Geographical mix (September 2023)

Mutual fund marketers and even brokers admit that much of incremental sales of mutual funds are coming from tier-2 and tier-3 cities, where there is a lot of buy-in for the concept of systematically managed investing. Today, semi-urban investors are looking beyond traditional asset classes like bank FDs, land, and gold; and mutual funds have emerged as a hot favourite. Greater digital connectivity is one reason, but there is a genuine buy-in.

• The mutual fund market is divided into the T30 (top-30) cities and the B30 (cities beyond top-30). If you compare September 2023 over August 2023, total assets of T30 centres increased by 1.47% to Rs39.41 trillion while the total assets of B30 centres increased by 3.51% to Rs8.38 trillion. Clearly, the AUM growth has been captured by the B-30 cities in September 2023. The share in AUM o fB-30 locations, has improved MOM from 17% to 18%.

   

• The B30 cities had a higher preference for equity assets as compared to the T30 cities in August 2023 at 81% compared to just 48%. However, this data cannot be taken at face value since most of the corporates and large institutional treasuries are based out of the T-30 centres, which could result in a skew of the data.

   

• For a more granular picture of the T30 / B30 story, let us look at individual assets rather than total assets. Nearly 26.2% of Individual assets as of September 2023 are located in B30 cities and 73.8% in T30 cities. Clearly, B30 cities are fast emerging as key players.

   

• SEBI had banned entry loads in 2009 and introduced Direct schemes in 2013. However, while 45% of the overall assets came through the Direct route, only 21% of the retail investors money came through the Direct route. HNIs are slightly better at 26%, but it looks like corporates and institutions are real beneficiaries of the direct route.

To sum it up, the September 2023 data released by AMFI suggests that mutual funds are becoming the default option for serious investors. In the last 2 months, individual investors have gained ground and equity as an asset class has also gained ground. The cult of mutual fund investing is spreading much faster than expected to smaller towns and, that too, at a rapid pace. This financialization of household savings is actually starting to happen.