What will drive the next round of growth in the mutual fund industry?

The Indian mutual fund industry has grown by leaps and bounds in the last 2 decades, especially in the last 5 years with a CAGR of more than 20%. 

The industry’s AUM(Assets Under Management) had crossed the milestone of Rs 10 trillion for the first time in May 2014 and in a short span of about three years, the AUM size had increased more than twofold and crossed Rs 20 trillion for the first time in August 2017. The AUM size crossed Rs 30 trillion for the first time in November 2020. The industry AUM stood at Rs 38.2 trillion as of October 31, 2021 

What has led to this tremendous growth?

 A confluence of factors have led to this exponential growth

• Increase in awareness quotient
• Young India and rising smartphone/ internet penetration.
• A gamut of enabling platforms and adoption of digital transactions.

Increase in awareness quotient.

Awareness and the advantages of mutual funds over traditional products such as fixed deposits have increased considerably in India. I must say, Investor education events by AMC’s and AMFI’s successful campaigns such as ‘Mutual Funds Sahi Hai’ have done a commendable job in ensuring mutual funds reach the nooks and corners of this country.  

SIP as a tool to enter mutual funds has been well accepted and has become the most preferred mode of investment in mutual funds. The monthly SIP book size of the industry crossed the monumental milestone of Rs 10,000 Crores recently. It means that every month the mutual funds industry will invariably see an inflow of Rs 10,000 crs through SIPs. On average, we see 20 lakh new SIP accounts opened every month. As of Oct-2021, there were around 4.6 Cr outstanding SIP accounts. 

A young population and rising smartphone/internet penetration

India is not just a large market, but also has one of the youngest populations, especially compared to larger markets like the US and China. Thanks to inexpensive internet costs, India currently has 600-650m internet users. Many financial influencers have capitalised on this and have built a large community to drive awareness and engagement on social media. 

Over the next five years, India’s internet user base will rise to 950m-1bn, which is a tad higher than China’s today. (Source: Jefferies report).  This will serve as the foundation for a sharp rise in the adoption of e-commerce, digital payments, and fintech platforms. 

A gamut of enabling platforms

Needless to say, India has been fast and forward-looking in building a robust stack of digital platforms. The JAM trinity—Jan Dhan Bank Account, Aadhaar-based identification/ e-KYC, and Mobile—have laid the foundation. 

Today, most of the mutual fund/SIP transactions are digital which come from various aggregators and distributors. Digital transactions now contribute 70% of the overall transactions of AMC’s. The emergence of wealth tech platforms like digital brokers, bundled investing, Robo-advisors, etc. has accelerated growth. With rising digital adoption and a growing base of wealthtech investors, the Indian wealth tech market is poised to grow from US$20bn in 2020 to over US$63bn by 2025, as per RedSeer. 

Passive and solution-based funds to lead future growth in mutual funds

While much has been deliberated on how the future of the Indian mutual fund industry looks like, there are two topics that strike a chord in my heart – Passive funds and Solution or Goal-oriented funds.

1. Passive funds

 You can download our detailed report which encapsulates the past, present, and future of passive investing in Indian and abroad – https://lnkd.in/gM2sbxxd

Also, it is essential to note that, wealth tech/Aggregator- players are likely to transform from distributors to manufacturers. Large players such as Groww, Zerodha are moving from distributors/trading platforms to become a manufacturer of financial products via entry into the mutual funds space. These players are more likely to take the passive/ ETF approach, which would keep costs low, would be easier for benchmarking and would not position them neck-to-neck with incumbents that enjoy strong brand positioning.

As we have deliberated much on passive investing in our conclave and report recently. I will focus on the next segment.

2. Solution or Goal-oriented funds.

While the growth in customer folios in solution-based products such as Retirement and Children’s fund is very low, the AUM of these funds has been growing at a healthy rate although the base is small.

Recently, in our Go Passive conclave, Zerodha’s CEO Nithin Kamath also hinted that their new AMC will disrupt the industry through the launch of some innovative funds in the field of solution-based funds such as retirement funds.

In many developed countries, solution-based funds such as Target-date portfolios and model portfolios constitute a major chunk of the industry AUM. As of Dec 2020, there were around USD 41,842 billion retirement assets in the USA. (Source: SIFMA)

Target-Date Portfolios: A target-date portfolio is geared to investors who will retire or require income at an approximate year. The portfolio is managed to meet the investor’s goals by the pre-established year or “target date.” Target date funds are designed to help you avoid one of the most common investing pitfalls—failing to adjust your portfolio for your changing financial needs over time. The portfolio moves from more aggressive to more conservative as the target date approaches and beyond, helping to reduce risk and prepare you for retirement.

I am personally bullish on the new-age tech AMC’s who will launch highly simple solution-oriented innovative products that can be relevant to every house and individual.

Food for thought!

Did you know, In India, while there are 42 active AMC’s, there are no ELSS (Tax-efficient scheme) in the Passive (Index/ETF) category? Shocked right! But it’s true 🙁

Harish N works with Fisdom as a Strategy Manager in Founders’ Office. He comes with a rich experience of having worked more than 5 years in the mutual fund Industry. He is also a passionate musician and plays Tabala.