Mutual Funds’ Rs 100 Trillion Opportunity

Despite strong AUM growth, MFs lag behind other popular investment avenues.
MFs received only 6 per cent of total household savings in 2021-2022.

In 2019, the mutual fund industry, then managing Rs 25 trillion in assets, unveiled its first ever vision document.

Drawn up jointly with the Boston Consulting Group, it laid out a strategy to accelerate penetration and ramp up assets under management (AUM) to at least Rs 100 trillion by the end of 2030.

Owing to robust growth since, the industry is poised to meet this target.

In the three years from 2020 through 2022, AUM has increased 50 per cent to Rs 40.7 trillion, a compound annual growth rate of 14.4 per cent.

If the industry continues to grow at this pace, the goal appears within reach — although much will depend on the equity markets and, importantly, on economic growth in India and across the world.

The post-Covid stock market surge was a key growth driver.

The importance of market movement is reflected in differing AUM growth in 2021 (22 per cent) and 2022 (7 per cent). The market rallied strongly in 2021, but was range-bound in 2022.

Sustained growth will also depend on expanding the reach of MFs, as Amfi (the Association of Mutual Funds in India) recommended in the vision document.

It prescribed several measures to expand the market: Enhancing distribution reach, simplifying products to expand inclusion, leveraging technology, leveraging partnerships, and deeper penetration of the savings wallets of both existing and new investors.

The industry has pursued initiatives on these lines in the last few years. Here is a list of them and how they have fared:

1. Enhancing distribution reach

In 2021, Amfi launched two initiatives — MFD Karein Shuru and an internship programme for new MFDs (mutual fund distributors).

The first is a series of television commercials portraying MF distribution as an attractive profession with the opportunity to make a positive impact on peoples’ lives.

The internship programme aims at handholding interested candidates in the process of becoming MFDs while also providing financial support in the first few months.

Since these initiatives are not even a year old, it is difficult to gauge their effectiveness. But both have seen slow starts.

While the advertising campaign is facing a budget challenge, the internship programme has not elicited interest from many fund houses.

Nevertheless, the number of distributors has been growing steadily.

The number of those that have built considerable wealth through MF distribution has risen across the country, proving that MF distribution is a viable income option.

According to a report by IDFC MF, there were over 1,200 MFDs as of March 31, 2022, with assets worth Rs 100 crore (Rs 1 billion) under advisory.

2. Product simplification

To Indian investors MFs have always meant equity schemes.

As of September 2022, active equity schemes accounted for 80 per cent of total active SIP (systematic investment plan) accounts.

However, other types of schemes are catching up, thanks to a renewed focus on simplified products.

On the debt side, the launch of Bharat Bond ETF (exchange traded fund) started a new chapter in the fixed-income space.

The category, now known as target maturity funds, has become one of the most popular products in the debt space, and for a good reason: It is similar to a bank fixed deposit (FD) owing to its ability to deliver predictable returns at negligible risk.

Passive equity funds, which are also comparatively simple, have helped MFs expand their reach.

On the awareness front, the MF industry has continued its outreach through investor awareness programmes and ‘MF Sahi Hai’ advertising campaigns.

3. Leveraging technology

MFs, like most other industries, witnessed a wave of digitisation after Covid.

Restrictions on physical movement led MFs and the entire ecosystem, from distributors to registrars and transfer agents (RTAs), to adopt digital processes.

The move was accelerated by the push provided by online investment platforms such as Groww, Zerodha and Paytm Money.

Sebi, the regulator, also played its part. For example, it asked RTAs to introduce a common transaction platform for MF transactions.

Together they created the MF Central portal, which has helped investors make non-financial transactions such as changing bank accounts and mobile numbers.

MFs still fifth preference of retail investors

Despite strong AUM growth, MFs lag behind other popular investment avenues.

MFs received 6 per cent of total household savings in 2021-2022 (FY22), according to RBI data.

Banks received 26 per cent, provident and pension funds (including the Public Provident Fund) got 23 per cent, followed by life insurance funds (17 per cent) and small savings schemes (13 per cent).Mutual Funds’ Rs 100 Trn Opportunity

This was despite a 150 per cent year-on-year jump in gross inflows from retail investors, at Rs 1.6 trillion, in FY22.

Similarly, the MF AUM-to-GDP ratio is around 16 per cent for India, compared with the global average of 74 per cent.

Industry insiders and distributors cite retail investors’ preference for guaranteed returns as a major roadblock in the way of higher MF penetration.

Also, commission payouts to MFDs are far lower than insurance commissions; this too has kept products from reaching more investors.

To be sure, MFs are allowed by the market regulator to offer B30 distributors (those catering to cities beyond the top 30) extra incentives.

They pay such distributors 30 basis points more. And data show that MFs are catching up in B30.

In 2022, the folio count in B30 grew 19 per cent, compared with 16 per cent in T30 (top 30 cities).

Defining trends of recent years

Passives pick up pace

2020 marked the dawn of the passive investing era in India.

From fund launches to the flow of investments, the last three years have seen a lot of growth in the passive space.

In 2022, passive funds defied the market slowdown and a rising interest-rate environment to record 45 per cent growth in AUM, which rose to Rs 6.7 trillion.

By comparison, overall AUM grew just 7 per cent last year. Passive schemes have gained traction owing to their low-cost structure and ability to deliver returns in line with the performance of their benchmarks, at a time when fund managers of some categories of active funds are finding it difficult to outperform the benchmarks.

AMCs (asset management companies) have also attempted to gain a foothold in the passive space, though the margins are lower than in active funds.

MFDs too have begun selling passive funds, in spite of the lower commissions they fetch.

Investors warm to direct plans and digital

Direct plans, which are free of distributor commissions, turned 10 on January 1.

This segment has steadily gained ground since its launch.

As of April 30, 2022, AUM routed through direct plans amounted to Rs 16.94 trillion, or 45 per cent of total AUM. Of the direct plan AUM, participation by individuals (other than high-net-worth individuals, Hindu undivided families, and non-resident individuals) was 11.2 per cent, according to Sebi.

The online route for investing in MFs isn’t new, but post-Covid, it became the preferred choice of a large majority of investors.

Restrictions on movement, coupled with aggressive marketing by online direct MF investment platforms, enabled the change.

The industry credits the steps toward digitisation taken by the regulator and the overall MF ecosystem, including RTAs, for its recent strong growth.

Some 98 per cent of MF transactions were done digitally in the last five fiscal years, Anuj Kumar, managing director of India’s biggest RTA, said recently.

Fintechs and PMS firms attempt MF foray

In 2020, Sebi allowed fintech players to enter the MF space to ‘facilitate innovation and enhance reach’, by doing away with the profitability criterion for becoming a MF sponsor.

Many fintech firms, PMS (portfolio management services) firms and MF distributors then applied for a MF licence.

By the end of 2022, seven such applications were pending with Sebi.

Four others — Zerodha Broking, Frontline Capital Services, Old Bridge Capital and Helios Capital Management — had received in-principle approval, while Bajaj Finserv has just got the final go-ahead.

This indicates a belief in the industry’s future. Prospective entrants see huge potential in the fact that MF penetration is 16 per cent of GDP in India, against a global average of 74 per cent.

Active regulatory changes

Skin in the game

In 2021, a Sebi issued a diktat requiring fund managers to have more stake in funds.

Key employees of MFs were mandated to invest about 20 per cent of their salary in the schemes they ran or oversaw.

These units are locked in for a period of three years and subject to claw-back in case of a violation of the model code of conduct prescribed by AMCs and Amfi.

Sebi argued that the move would align the interests of fund managers and that of investors. However, many in the industry consider it intrusive.

Development of passive funds

The passive MF industry received a shot in the arm in 2022, when Sebi announced measures to boost ETFs’ liquidity, while also fostering a passive fund ecosystem that facilitates essential structural changes.

The steps include appointment of at least two market to ensure continuous liquidity, in addition to framing incentive plans for such entities.

Further, AMCs were asked to directly create units only for transactions of above Rs 25 crore.

Several transactions will, therefore, be pushed onto the exchanges, raising both demand and supply, creating a potent structural play for increased investor participation and higher liquidity in exchanges.

This part of the circular has yet to come into force.

Ban on pooling of funds

Sebi has banned the use of pooled accounts by brokers.

This led to discontinuation of the practice of MF investments through wallets provided by brokers.

Now, all MF investments mandatorily go directly from the investors’ account to the fund house — a move that enhances investor protection.

New risk management framework

Sebi unveiled a revised risk management framework (RMF) in 2021, requiring AMCs to self-assess their RMF and practices.

The RMF is divided into four parts — governance and organisation, identification of risks, measurement and management of risks, and reporting of risks and related information.

The regulator also laid out specific functions of various personnel.

Insider trading rules extended to MFs

Sebi has amended norms to bring buying and selling of MF units within the purview of insider trading rules.

This entails mandatory disclosure of details of holdings in the units of its MF schemes, held by the AMC, trustees and their immediate relatives on the platform of stock exchanges.

Tighter investment norms for MF officials

Fund managers and senior MF officials now have to seek numerous permissions before investing their money.

Sebi has also introduced curbs on redemptions to ensure that they do not resort to front-running or use inside information to their advantage.

For example, any share that the fund house has traded in the past 15 days is out of bounds until the 15-day ‘cooling period’ is over.

Once bought, shares cannot be sold for at least six months. The rules are easier when buying MF units of other fund houses.

Fund managers and key officials do not need prior approvals for buying or selling MFs of another AMC, but must inform their fund house within seven days of buying a scheme.

The regulator has also been proactive in protecting investors at times of failure or mismanagement by MF houses.

All of this put together has made it easier and safer for investors to invest through mutual funds.

Feature Presentation: Rajesh Alva/

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