How mutual funds market has diversified itself in last decade

There is a growth in different types of mutual funds in India over the past decade. The total assets under management (AUM) in the mutual fund industry are climbing north since the past decade. The AUM stood at Rs 25,81,026 crore as on July 2019 and has been growing at 10-15% annually since 2009. The growth rate for the Indian market has surpassed all the neighboring economies, in addition to the world average.

In the past decade, a changing trend has been observed with the rising equity market, lowering interest rates on some of the traditional products, a campaign from the Association of Mutual Funds in India (AMFI) and establishment of numerous fintech companies for the job of advisory and distribution.

These factors collectively have resulted in the rising penetration of the mutual fund in the economy.

Types of Mutual Funds

  1. Equity Funds
  2. Debt Funds
  3. Hybrid Funds
  4. Balanced Funds
  5. Index Funds

Let us see how the types of mutual funds in india has been diversified over the past decade –

Share of MFs on a rising spree in the capital market

The growth of MFs has resulted in different emerging trends in the domestic market. The percentage of capital flowing through MFs in the total capital flowing in the market has been rising. The number has increased from ~8% in 2014 to over ~18% in 2019. On the other hand, the share of Foreign Portfolio Investors (FPIs) has been declining when compared to MFs. The shift signals that the domestic investors are becoming more prominent, particularly after the demonetization, announced in November 2016, where the investors are not left with much investment avenues.

More savings in the MFs

Of the total savings of a household, the share held by the MFs has been on the rising spree since the past decade. Of the total financial savings in the economy, the percentage of MFs has increased in the past three years to nearly 15% in 2019 from less than 5% a decade back.

In the overall debt market, the banks and insurance companies continue to invest more in the government securities, but there has been a shift in the corporate debt market where the dominant flow is coming from the mutual funds.

Debt remains favorable

Among the open-ended mutual funds, over 50% of the total investment is made in the debt funds, followed by 30% in equities and the remainder in the hybrid funds. The trend is due to higher value participation coming from India Inc.

Talking of only the individual investors, the equity continues to remain the flavor of the industry given higher returns offered.

SIPs faired well against lumpsum

In the past decade, there has been a dramatic increase in the number of SIP accounts registered. This indicates that the investor, particularly retail class) is understanding the concept of compounding well. The number of SIP accounts has more than tripled in the past decade.

Number of individual investors up

There has been a record rise in the number of name folios of individual investors in the sector. Over 71 million individual folios are there in the industry, with over 95% being the retail class. More than 15 million folios have been in the past year, signaling the strategic shift towards mutual funds as an investment instrument for the mass.

How has the regulation changed over the decade?

The MF industry was opened for the private sector in July 1993, thereby providing investors with more comprehensive choices for investments. The first set of regulations came into effect in the same year when the 1993 rules were announced. Since 1993 the industry has seen a tremendous change in the law, and the same has empowered the unsophisticated investors. Let us see how –

February 2008

The SEBI asked fund houses to maintain a record of the investor through mandatory Know Your Customer (KYC) process. The KYC was initially mandated for investments higher than Rs 50000 and was later made compulsory for all the investment.

June 2009

SEBI abolished the entry load on mutual fund investments. Entry load was previously charged at the time of investment and where the fund houses used to charge 2 to 2.5 percent of the initial investment amount.

August 2010

AMFI under the Prevention of Money Laundering Act, 2002, issued notification for fund houses to stop using third-party cheques except few exceptions to be approved on a case to case basis.

May 2011

SEBI asked fund houses to provide an option to the investors to receive the allotment of mutual fund units in the Demat account at the time of subscription. Until 2011, there was provision to hold close-ended funds in Demat form, but there was no mention of open-ended schemes.

August 2011

The government liberalized norms for Qualified Financial Investors (QFIs), allowing to invest directly and buy units of the Indian funds up to a cumulative of $10 billion per year. Previously, only SEBI registered FIIs and FVCIs were allowed to invest in Indian funds.

September 2013

SEBI announced direct plan for all existing schemes with effect from January 1, 2013. These plans are not routed through a distributor, thereby has lower expenses.

July 2014

The finance minister, in the budget speech, changed the definition of long-term from 12 months to 36 months. Any debt investment held for less than 36 months is now considered as a short-term investment.

April 2017

Finance ministry mandated all fund folios (opened between July 2014 to August 2015) to be FATCA compliant. FATCA allows for automatic exchange of financial information between India and the US.

October 2017

SEBI announced categorization and rationalization of funds to ensure evaluation and comparison is more comfortable between different options. The move was aimed to bring in uniformity in the system.

January 2018

SEBI asked the fund houses to benchmark the schemes against Total Return Index (TRI) as TRI takes into account dividends/ interest payments that are generated from the basket of constituents making up the index.

February 2018

Finance minister, in his budget speech, announced the re-introduction of long-term capital gains tax. The minister mentioned that the capital gains exceeding Rs 1 lakh arising out of equity funds would be taxed at 10 percent without indexation.

To conclude, the fund industry has come a long way since its inception in 1963. However, in the last decade, the sector has witnessed sufficient growth on parameters such as the number of funds, number of fund houses, funds mobilized, and assets under management, regulation, and the likes. Having said that the market remains very premature, leaving behind massive scope for growth. The penetration of funds in the overall economy when looked at as a percentage of GDP remains very small in single-digit when compared with developed nations like the USA.