Retail investors take a shine to mutual funds
Greater penetration, tech adoption and key regulatory changes must sustain for the MF industry to leapfrog to the next stage
Technology adoption and easy access to information have altered consumer trends in the mutual fund industry significantly in the last few years. If the pace of changes sustains, the industry could well take a quantum leap in the next few years.
Industry goes retail
As of March 2018, individual investors held 55 per cent of the total mutual fund assets in India. That may appear paltry compared with the US, where retail investors held 90 per cent of the $18.7-trillion mutual fund assets as of end-2017. In the US, MF assets are held not just directly by households but also indirectly, through retirement accounts.
The good part, however, is that the share of individual investors in Indian funds has been rising, from just 43 per cent as of March 2008.
Within the universe of individual investors, it is small investors who dominate the folios. The number of small retail investors has grown to 67 million as of March 2018 from 46.4 million in March 2009, taking their share of total assets to 25 per cent from 21 per cent. The share of high networth individuals (HNIs) in total assets has risen to 30 per cent from 22 per cent, as their folio count increased nearly seven-fold to 3.9 million from 0.6 million.
Two positive trends have underpinned the rising retail participation.
First, there is better penetration. The Indian MF industry, which used to be concentrated in a few metros and major cities just a couple of decades ago, has significantly increased its presence in the hinterland. The share of individual investors from cities beyond the top 15 (called B15 cities) has grown from 22.5 per cent as of March 2014 to 28.2 per cent as of March 2018.
Much of this growth can be attributed to the additional 30 basis points in expenses, that the regulator has permitted asset management companies to charge for promoting MF products outside the top 15 cities.
Recently, in a sign of the industry maturing, the regulator allowed higher expenses only for assets sourced from cities beyond the top 30 (B30) instead of just the top 15.
Two, there’s the success of systematic investment plans. With individual investors transitioning to disciplined investments in the form of systematic investment plans (SIPs), inflows into funds through SIPs have grown exponentially, from Rs. 3,122 crore a month in April 2016 to Rs. 7,727 crore as of September 2018, taking aggregate inflows through SIPs during this period to Rs. 1.56 lakh crore, or a whopping 24 per cent of the overall flows. More importantly, the inflows have sustained despite volatility in the markets — a far cry from yesteryear.
That said, it is of some concern that individual investors — especially retail — have thus far restricted their investments mostly to equity-oriented mutual funds (84 per cent of overall retail investments as of March 2018). Instead, investors should be looking to engage across the spectrum of products available, including debt-oriented products. Plus, SIP investors should note that investments through this route yield better returns only if held for the long term (7-10 years).
Advent of retirement money
Apart from individual investors taking to mutual funds, another noteworthy trend is the entry of major retirement players into mutual funds. With the Employees’ Provident Fund Organisation steadily increasing its equity allocation, inflows from this source have quadrupled the share of exchange traded funds (ETFs) in the Indian MF industry’s assets. They stood at 4 per cent as of September 2018 compared with just one per cent in March 2016.
Though these inflows represent a marginal share of the money managed by the biggest retirement vehicle in the country, this is a good start and can potentially alter the Indian MF landscape.
Surely, much more can be done for retirement money to flow into the mutual fund industry either directly or through the institutional route.
A third possible trigger for the mutual fund industry may come from technology adoption. The industry has already made a start on deploying technology intelligently across all its processes — fund management, execution of transactions, and customer servicing — and has also benefited significantly from digitalisation of the payment spectrum.
The share of digital gross inflows increased from just 0.5 per cent of industry assets two years ago to more than 6 per cent as of March 2018 and to nearly 10 per cent by June 2018.
Clearly, the role of technology can only get bigger from here. Tech adoption will be a win-win for all — the industry, intermediaries and investors. It will deepen the industry’s penetration, allow it to improve efficiency and reduce costs, and ultimately bestow these benefits on investors.
Recent regulatory changes pertaining to classification of schemes have helped transform MFs into more standardised products for investors. The industry is also working on reducing its expenses. This, coupled with the regulator’s push to an advisory model could improve adoption of direct plans, currently a stranglehold of institutional investors, by individuals as well.
These changing consumer trends indicate that investors are increasingly looking at mutual funds as an important tool for their financial planning needs.
For the industry to leapfrog to the next level, it is important that these trends sustain. In the context, efforts to boost awareness of mutual funds across the product spectrum and greater adoption of technology become imperatives.