The New Savings Tool

The Indian Mutual Fund (MF) industry’s growth blistered in FY17. According to the data published by the Association of Mutual Funds in India (AMFI), the industry’s cumulative assets under management (AUM) skyrocketed by 42 per cent in the period between April 2016 and March 2017, from Rs 12.3 lakh crore to Rs 17.5 lakh crore. While a sizeable chunk of this AUM growth is attributable to strong fund performances both on the equity and debt sides, it is undeniable that MFs are witnessing a steady transition from being a preferred investment avenue for high net worth individuals (HNIs), to serving as a savings tool for the lay investor with a below average understanding of the nuances of stocks and bonds.

Sundeep Sikka, ED and CEO, Reliance Mutual Fund says this trend can be ascribed to a broad increase in risk appetite among the retail investor base. “As per current data, they seem to have invested 60.6 per cent of their money into equity-oriented schemes” he notes.

The concerted yearlong efforts by AMFI, Sebi and asset management companies to promote investor awareness among the masses may have finally started reaping dividends. Two basis points (0.02 per cent) of the industry AUM, or roughly Rs 350 crore per annum, is currently mandated to be set aside for such activities. That explains the sudden ubiquity of those large hoardings promoting mutual fund investments as the “sine qua non” of wealth creation!

“The industry has focused on expanding its reach outside the largest cities. This has increased the number of mutual fund investors,” says Chandresh Nigam, MD and CEO, Axis Mutual Fund.

Overall, the industry added 77.4 lakh folios in FY17, an average of over 6.4 lakh folios per month. At the end of March, the total industry folio count stood at 5.54 crore. Over a million folios were added in March alone, with 3.2 lakh new folios being added within the ELSS (equity linked savings scheme) category, as investors scrambled to park away moneys to fulfill their Section 80C gaps at the end of the fiscal.

“Awareness has increased among savers, and they are acknowledging mutual funds as an efficient tax saving alternative,” says Anuradha Rao, MD and CEO, SBI Mutual Fund.

Popular Demand: Liquid Funds
An interesting trend was observed within the liquid fund category, whose folio count more than doubled in FY17. Liquid funds invest into very short-term debt instruments with maturities ranging from a few days to three months, and hence carry a low degree of interest rate sensitivity and default risk. They are, therefore, ideal for parking short-term moneys, and are a viable alternative to savings accounts and short-term fixed deposits. With deposit rates plummeting after the demonetisation drive, retail investors seem to have flocked to liquid funds in hordes to deploy their suddenly available surpluses!

“We have seen investors choosing debt funds such as liquid funds to obtain returns while retaining high liquidity,” says Nigam.

Further, technology linking shortterm debt fund investments to mobile apps, such as Reliance Mutual Fund’s Simply Save and ICICI Prudential Mutual Fund’s iSave, lent a further fillip to liquid funds. These apps allow seamless investments into and redemptions from liquid funds; some even facilitating T+0 credit within predefined amount bounds.

“We believe that we will see more retail participation in liquid funds, considering the new Sebi framework related to instant redemptions,” predicts Sikka.
Financial year of 2017 is set to go down in history as the year that liquid funds caught the fancy of retail investors. Prior to this, corporate investors largely used them to manage their short-term liquidity.

SIPs: The AUM Multiplier
SIPs (systematic investment plans) emerged as the top choice for retail investors, who have long viewed equity-linked instruments with trepidation, despite their unquestionable potential for wealth creation in the long haul. SIPs provided a much-needed tailwind to equity linked MFs in FY17, driving the total category exposure up to Rs 5.4 lakh crore; nearly a third of the size of the overall MF pie. “SIP awareness has increased due to concerted efforts by AMCs, distributors and the media to popularise this simple yet powerful concept. Banking channels too have contributed considerably in making their customers choose their first investment in the form of an SIP,” says Rao.

The AMFI data says, the industry added nearly 75 lakh SIP folios in FY17, with the average ticket size standing at Rs 3,100 per month —that’s a potential incremental “automatic” AUM inflow of nearly Rs 2,300 crore per month; Rs 28,000 crore in FY18. Aided by the burgeoning popularity of SIPs, we can expect retail participation in equities to keep expanding. The steady emergence of robo-advisory or DIY investment platforms, mobile app-based investment solutions and tech-intensive bionic advisory platforms will likely continue to push this trend by bringing down the cost of advice.

Industry Risks for FY 2018
While the growth of the MF industry has been nothing short of stellar in 2017, risks loom large. The foremost one is posed by the markets, of course.

Inflation, uncertain global political environment and the lack of earnings growth still pose a credible threat to the markets, at least in the short run. It is yet to be seen how many of these equity folios have the mettle to outlast a perfect storm; particularly the unadvised ones, which were self-initiated by novice investors or those that flowed into direct plans of AMCs, whose efficacy to drive appropriate investor behaviour remains contentious.

In the fixed income space, unpredictable events such as the BILT credit rating downgrade fiasco that sunk some of Taurus Mutual Fund’s debt funds overnight, could potentially dent investor confidence and send them scampering back to the haven of traditional instruments.

Has the industry moved too fast for its own comfort? Well, only the litmus test of a severely bearish phase will prove or disprove the fact. For instance, have new investors fully understood the risks associated with MF investing before jumping in? Have they been sold products correctly, whether digitally or by a human advisor? Will they allow their SIPs to continue dispassionately if markets head south, or will they panic and succumb to the ‘action bias’, promptly abandoning their meticulously planned financial goals and their beliefs in the merits of rupee-cost averaging.

While the questions hang in the air, the industry must move to secure its existing client base by dedicating a portion of its investor awareness budget to pre-emptively educating them on some potentially fatal investing missteps. Ignoring this, while expending resources purely to widen the existing investor base will be akin to taking two steps forward and one step back.