ED & CIO SBI Funds Management Private Limited
Assets under management (AUM) of mutual funds in the last 1 year have grown by 31%, while total AUM for September 2017 has scaled up at ₹20.4 lakh crore, according to the Association of Mutual Funds in India (AMFI) data. The data also indicated that MFs received inflows of ₹20,000 crore in September, consecutively for the second month, taking the year-to-date inflow tally beyond ₹1 lakh crore. Investors had brought in a whooping ₹20,362 crores into equity mutual funds in August 2017, taking the tally of the overall industry AUM to ₹20.6 trillion. The total number of mutual fund folios as of September 2017 is 62 million (39.5 million three years ago), of which 45 million are equity folios.
Indian MF industry is seeing a structural shift with steady growth in the number of investors in both equity and fixed income funds. There has been a tremendous increase in the retail investors’ participation. Retail investors have grown by around 15% in past one year and now account for approximately 94.54% of the total folio count. Increasing participation through SIP is a positive trend which will augur well for the sustainable growth in MF assets. At SBI Mutual Fund, we have aggressively focused on creating new digital assets and investor education programs. We have created a dedicated portal and mobile applications for our distribution partners. Through our investor education program, we have been able to upsurge our reach to both rural and urban investors. We intend to improve our reach in untapped potential areas through increased use of technology through various user-friendly channels and platforms.
Indian mutual fund industry has witnessed tremendous growth over the last couple of years with AUM reaching ₹20 trillion in the current FY. As finance is getting digitized, the household savings are getting financialized. The sheer decline in the interest rates and easy liquidity post demonetization has also played an important role in savings moving to equities. Markets have seen significant flows in the past years and this growth was tremendous post demonetization. However, the industry AUM is still significantly low as a percentage of GDP. Hence, we believe that growth momentum in the coming years may continue and with the increased awareness, MF penetration will lead to further surge in assets.
Indian household savings patterns have been witnessing some massive structural shifts of late. Households in India have historically been quite wary of investing their savings into risky assets. A pursuit of safe bets has always driven India towards making investments in assets like gold and real estate. This pattern is slowly changing, especially since demonetization in November 2016. Post demonetization, a non-linear shift towards savings in financial assets has been noticed for Indian households. Mutual funds have been the highest contributor to this trend. Interestingly, retail investors have driven this expansion as much as conventional corporate treasuries. Post-demonetization, MF investments seem to be an appealing alternative than holding cash or investing in assets like gold and real estate for the risk-averse households across India as a whole.
This shift is bound to have a few positive outcomes for the Indian economy. First, higher domestic investment is making Indian equity markets less vulnerable to foreign fund flows. This makes Indian markets highly resilient to sudden pull-outs by the later. Second, the growing popularity of SIP is bringing stability in domestic investment patterns as well.
Indian equity markets have seen significant growth recently and market valuations have gone up. Looking at the current market valuations, we have been highlighting to our investors that future return expectations need to be moderated. We have been communicating the message to internal sales team as well as our advisors that markets may not be able to recreate the returns that it has delivered over the last 3 years. We are putting in efforts to make investors understand that this kind of growth in not sustainable in future and should be kept in mind while making future investment decisions. Given the current valuation, equity returns from here on are likely to be in line with the corporate profit growth.
Financial services constitute a large part of the economy and most of the indices have a weight of at least 25% or so for the financial services. Over the last few years, other than banks, we have seen an increase in the size of NBFCs, HFCs, MFIs, small financial institutions, etc. A typical large cap oriented mutual fund scheme would have around 30% exposure towards banking and financial services sector.
The investor composition in terms of geography has seen some change over the years with increase in investments from B-15 cities. In the last 6 months, within the debt fund category, retail investors’ AUM increased higher in T-15 cities than in B-15 cities. However, there still lies a significant untapped potential to be captured in this segment. A key hindrance in acquiring assets from the smaller towns has been the reach, which is being overcome with the help of digital initiatives. Another reason is the lack of investor awareness about the products and solutions offered. In this regard, massive investor education programs such as ‘Mutual Fund Sahi hai’ are helping in clearing the myths about mutual fund investing. Investor awareness campaigns in regional languages are also helping tap the unbanked potential in B-15 and other smaller cities in India.
Technology has evolved to be one of the most important aspects of our life. It has become a key enabler in increasing connectivity and reach for every business. A variety of forces including the Aadhar (biometric card), cheaper data connectivity and rapid adoption by a young population has led to a paradigm shift. With new digital platforms in the form of applications and web portals, companies in wealth management sector can create targeted solutions for different stakeholders to provide quick and hassle-free experience.
It has become a crucial element across mutual fund operations spanning from transaction processing and fund management to distribution and customer service. Fund houses offer a range of mobile and online applications for tracking and transacting portfolios, as well as for effective distribution and customer service. Mutual funds are using social media to reach out to customers, especially millennial customers, and employing analytics in data-driven models for improving offerings and customer engagement. Additionally, the launch of differentiated banks (Payment Banks) that will be allowed to sell third party mutual funds will help increase the market reach of the fund industry. Technological advancement is going to be a key enabler for mutual funds to increase its reach across India and improve customers’ onboarding and investment experience.
*Published in Banking Frontiers magazine November 2017 edition