The ‘explosive growth’ of assets under management (AUM) of mutual funds in India is a story told many times in the last few years. Generally, to support the story, growth in AUM is used as the statistic. The AUM grew from ₹8.26 trillion in January 2013 to ₹39.62 trillion in January 2023 — a 4.8-fold nominal increase.
During this 10-year period, GDP grew 2.25 times; the Consumer Price Index, 1.9 times; the securities market investor population, approximately measured by demat accounts, 7.47 times; bank deposits, 2.80 times; equity market capitalisation, 4.29 times; and equity derivatives turnover, by more than 20 times.
In the context of these numbers, is the growth in the AUM of mutual funds that dramatic or in tune with its potential? And if the growth rates are to be taken at face value, AUM increase at 6.82 times was higher during the earlier decade from 2003-2013.
Progress on many fronts
India is amongst the fastest-growing major economies in the world, and it also has one of the largest young population. Due to these two factors, a large number of households have entered the middle-income bracket. This is the income segment mutual funds are essentially designed to serve. The nuclearisation of families, increasing life expectancy and the rising costs of living have motivated individuals to look for avenues for planning their retirements, and mutual funds are a potential candidate for managing this money.
If mutual funds can provide better risk-adjusted returns than direct investments, it will be win-win for the investors as well as for the industry. Yet, only around 2 per cent of India’s population invest through mutual funds.
In many countries, mutual funds flourished when the rate of interest of bank deposits were travelling southwards.
In India too, investors are moving towards capital market instruments in search of better yield. Investor would choose investments through mutual funds when they see the advantages of portfolio diversification and professional fund management at a low cost.
However, a larger percentage of equities are owned by investors directly. In the National Stock Exchange listed space, mutual funds owned 7.9 per cent whereas retail investors directly owned 9.5 per cent of the total market cap as on June 2022.
A part of the AUM of the industry can be attributed to an enabling regulatory environment.
Inflows to equity linked saving schemes (ELSS) are stimulated by the tax treatment. Of the ₹20 lakh-crore equity AUM, ₹2 lakh-crore plus is the exchange traded funds (ETFs) money of Employees’ Provident Fund Organisation (EPFO), as on March 2022 — that is, a good 10 per cent of the overall equity AUM.
Related magnitudes
There is strong evidence that countries with large stock market capitalisation to GDP have large AUM-to-GDP ratio. India’s equity market is well-developed and considered on a par with international standards, ranking 5th globally in terms of market capitalisation. Retail participation in the Indian stock market has seen a marked improvement over the last few years.
The number of demat accounts have increased from 120 lakh in 2012 to over 897 lakh in 2022. India’s stock market capitalisation to GDP ratio is more than 100 per cent, but the AUM to GDP is just around 16 per cent.
Though there is a significant increase from the year 2003 when it was a mere 3 per cent, compared to the global average of over 80 per cent, it is much lower. Countries with much lower stock market capitalisation to GDP ratios than India have higher AUM to GDP.
In many other countries including many developing countries, AUM/GDP have grown much faster than that of the Indian MF industry during the said period, even with a much higher base of AUM.
A supply side factor influencing the growth of the mutual fund industry is the distribution networks. Bank-affiliated funds are dominant players in the mutual fund space. Four of the top five mutual funds in India are bank-affiliated.
They contribute around 60 per cent of the overall AUM. Many of these mutual funds leverage on the branch network for distributing financial products. They also have solid brand recall.
In addition, technology is supporting market penetration like never before. Internet penetration rate in India went up to nearly around 50 per cent in 2022, from just about 4 per cent in 2007. Given these enabling developments, deep-digging is required as to why more than 80 per cent AUM still come from the top 30 cities in the country.
Therefore, though the mutual fund industry has come a long way from its early days, question still arises if this growth is in tune with the potential of the MF sector and the rapidly growing, formalising and financialising Indian economy.
The mutual fund industry itself is fully aware of the potential. That is why its vision document targets the AUM to cross the ₹100 trillion mark by 2030. That would be a landmark, in absolute and relative terms.
It could then justify the expectations from mutual funds to be the mainstay for retail participation as well to act as a countervailing force vis-à-vis other institutional investors in the financial sector — influencing the overall participation, promoting efficiency, innovation, and responsiveness to the needs of their investors.
Nair is Director, and Baid is Professor, National Institute of Securities Markets. Views are personal