Key mutual fund trends observed in January 2024

16 Feb 2024 , 10:10 AM

As of the close of January 2024, the average assets under management (AAUM) stood at ₹52.89 Trillion. SIP flows in January 2024 touched a record ₹18,838 Crore while the NFO (new fund offering) flows were relatively strong at ₹6,817 Crore, dominated by passive funds and multi-asset allocation hybrid funds. But the biggest cause of celebration was the SIP folios touching 7.92 Crore and SIP AUM at ₹10.27 Trillion.

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 January 2024 pertain to overall AUM of mutual funds, the mix and colour of AUM accretion and the nature of investors. The AMFI report also provides value added analytics like ageing of equity fund investments and average holding period. In the last few months, investors have shown much greater awareness of and inclination towards asset allocation.

Key Trends in Mutual Funds – Segment level (January 2024)

Mutual fund segment level trends for January 2024 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 ₹52.89 Trillion as of the close of January 2024, sharply higher than the AAUM of ₹51.09 Trillion as of the close of December 2023 and ₹48.75 Trillion as of the close of November 2023. That translates into dollar AUM of $635 Billion. The AUM accretion in January 2024 was a mix of index accretion and fresh flows. On a yoy basis, the mutual fund AUM has grown by a healthy 29.62% compared to January 2023. The frenetic bull rally of 2023 has carried forward its impact to January 2024 also.
   
• In the last couple of years, we have seen a gradual shift in the overall AUM mix from active debt to active equity. In January 2024, active equity funds and liquid funds gained market share over December 2023, while active debt funds and passive funds lost share. This can be attributed to the sharp appreciation in equity funds, combined with robust inflows, which made the equity funds relatively heavier. This even offset the robust flows into debt funds in January 2024. As a result, active equity fund share surged by 40 bps from 56.5% to 56.9% over December 2023 while it is up 590 bps on yoy basis. Passive fund share was down by 10 bps from 12.9% to 12.8% over December 2023 while it is down 30 bps on yoy basis. Active debt funds share was down by 50 bps from 17.5% to 17.0% over December 2023 while it is down 230 bps on yoy basis. Finally, let us turn to liquid / money market funds. The share was up by 30 bps from 13.1% to 13.4% over December 2023 while it is down 320 bps on yoy basis compared to January 2023.
   
• The interest in debt funds was not only hit by higher returns on equity funds in last couple of years, but also the unfavourable tax treatment of debt funds as per the modifications done in Union Budget 2023-24. A chunk of liquid fund flows is treasury flows, which explains why the share of liquid funds has risen MOM while the share of debt funds is down. Investors are unwilling to take an interest rate call on long term debt funds. However, it must be noted that liquid funds are facing stiff competition from arbitrage funds as a higher return alternative and a tax efficient option for HNIs. Equity market volatility has resulted in elevated interest in arbitrage funds. Passive funds, comprising of index funds, equity index ETFs, debt index ETFs and fund of funds (FOFs) saw market share trim marginally. This is the seventh month in a row that market share of passive funds has been under 13%, and the preference is clearly towards alpha. 
   
• Are individual investors playing a bigger role in mutual fund AUM as compared to institutional investors; a perceptible trend in recent months? If you look at the AUM share, the answer is fairly unequivocal and this can be largely attributed to the surge in SIP flows, especially from  the Gen-Z and millennial investors into mutual funds. In January 2024, gross SIP flows were at a record high of ₹18,838 Crore; a classic barometer of retail appetite for equity funds. Between January 2023 and January 2024, the share of individual investors in the overall AUM composition has gone up by 280 basis points from 57.30% to 60.10%. However, on MOM basis, the share of individuals in mutual fund AUM has been flat; which can be attributed to the strong debt market flows in January 2024, which tends to be dominated by corporates and institutions. At the same time, the share of institutions and corporates in the overall mutual fund AUM has fallen over the last one year from 42.7% to 39.9%. It was only in December 2023, that the share of retail crossed 60% and the share of institutional fell below 40%.
   
• How much have individual investors allocated to each of the various categories of mutual funds like debt, equity, liquids, and ETFs? As of January 2024, individual investors have a share of just 40% in debt oriented schemes and 13% in short term money market schemes. These are treasury products where demand largely is generated by the corporates and financial institutions. However, individual investors have an imposing 88% share of equity fund AUM. However, individuals have just 10% of passive fund AUM (index funds and ETFs). Retail investors are not leveraging passive products, the way corporate investors and institutional investors are doing; and that is disappointing.
   
• Let us turn to the individual investor allocation basket; meaning how much they have invested of their corpus in each asset class. As of January 2024, individual investors have 84% of their mutual fund assets in equity schemes and 11% in active debt funds. Liquid funds at 3% and ETFs at 2% are fairly insignificant. On the other hand, institutional investors and corporates have 29% of their corpus in liquid funds, 29% in ETFs / FOFs, 26% in longer period active debt funds and 16% in active equity funds. Higher share of equity and passive funds in institutional mix is on index rise and arbitrage fund demand.

As of the close of January 2024, overall assets of mutual funds in India have grown by 29.62% yoy. Assets of individual investors in this period grew by 35.92% while the growth in assets of institutional investors stood at a more subdued 17.42%. 

Key trends in mutual funds – Folios and Ticket sizes (January 2024)

Folios are investor accounts unique to an AMC. While they don’t represent unique investors, folios are good barometer of retail intensity. They tell you the retail story a lot better.

• There were total of 16.96 Crore folios as of the close of January 2024 of which retail investors accounted for nearly 91.3% of the total folios. In addition, HNIs accounted for 8.0% of the folios while institutions accounted for the balance 0.7% of the total folios. These ratios have been static over last few months with marginal changes. However, the retail share of folios comes down drastically when we look at active debt funds. Here, retail investors account for just 68.5% of the folios, while HNI investors account for 29.1% of the folios. HNIs also have a high share of folios of liquid funds (19.9%) and hybrid funds (23.6%); which are targeted principally at the savvy HNI investors. HNIs also have 5.1% of folios in index funds. What we have seen between December 2023 and January 2024 is that HNIs have moved out of liquid funds and index funds / ETFs, in favour of hybrid schemes, which offer better asset allocation to investors.
   
• When we look at folios, the big story is the geometric growth in folios 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 January 2024, the number of mutual fund folios have jumped sharply from 3.95 Crore to 16.96 Crore. That is a jump of 329.37% 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 (compounded annual growth rate) of 16.7%.
   
• There are two takeaways on folios and retail holding period. Firstly, average ticket size is sharply up at ₹3.08 Lakhs, while that AUM of retail investors in equity funds has also risen sharply to ₹0.85 Lakhs on an average. The average ticket size for equity oriented funds is at ₹1.93 Lakhs while for debt oriented funds it is ₹15.77 Lakhs. Retail averages are sharply up, and that can be attributed largely to the equity market rally.
   
• The general presumption is that retail investors tend to be less patient about investments. However, the average folio holding tenure contradicts this theory. In fact, the retail investors do not take a myopic approach to equity funds. As per data of January 2024, retail investors hold nearly 53.1% of the equity fund assets for more than 2 years. This is up from 43.7% in 2022. It underlines that retail investors are stickier and more committed to long term investing. This can be attributed to learnings post COVID.

In a sense, the surge in the individual investor share is linked to SIP flows, while the improved retail experience is linked to stickiness. The narrative surely looks impressive.

Key trends in mutual funds – Geographical mix (January 2024)

Recent studies about the colour of mutual fund flows have demonstrated that smaller towns now account for bulk of the incremental retail flows into mutual funds, especially into SIPs. Distributors admit that chunk of incremental sales of mutual funds are coming from tier-2 and tier-3 cities. There seems to be good buy-in for disciplined SIPs. Semi-urban investors are looking beyond traditional assets like FDs, land, and gold. Mutual funds fit the bill. Greater digital connectivity and massive outreach programs have also helped big time.

• The mutual fund market is divided into T30 (top-30) cities and B30 (cities beyond top-30). If you compare January 2024 with December 2023, total T30 assets are higher by 3.54% at ₹43.50 Trillion. Total assets of B30 centres increased by 3.46% to ₹9.39 Trillion in January 2024. The trend is ambiguous since most of the AUM accretion for both categories came from index appreciation, but folios are growing faster in B-30 cities.
   
• The B30 cities had a higher preference for equity assets as compared to the T30 cities in January 2024 at 83% compared to just 51%. However, this data needs to be read differently, since most of the corporates and large institutional treasuries are based out of the T-30 centres, which could skew the data. This makes the debt mix skewed towards the large cities, where most of the institutions are located.
   
• For a more granular picture of the T30 / B30 story, let us look at individual assets rather than total assets. Nearly 26.37% of Individual assets as of January 2024 are located in B30 cities and 73.63% in T30 cities. Clearly, B30 cities are emerging as key players.
   
• SEBI banned entry loads in 2009 and introduced Direct schemes in 2013. However, while 45% of the overall assets came through the Direct route, only 22% of the retail investors money came through the Direct route. HNIs are slightly better at 27%, but it is the institutional investors who are making the best use of the Direct route.

The January 2024 AMFI report suggests that mutual funds are actually coming of age in terms of reach, spread and intensity. In the last few months, individual investors are less obsessed about index assets and are back to good old alpha hunting.