Key Trends in the Mutual Fund Industry

“Mutual fund (MF) investments are subject to market risks.” Well, that’s true. But if you make an informed investment, you can easily say “Mutual Funds Sahi Hai” (mutual funds are the right choice). As people understand more about this investment tool and its effectiveness in the medium-to-long-term, the total Assets Under Management (AUM) of the mutual fund houses keep expanding rapidly. Indian MF industry’s AUM has increased from Rs. 4.17 trillion (4.17 lakh crore) in March 31, 2009 to Rs. 23.80 trillion (23.80 lakh crore) by March 31, 2019, more than 5 times in just 10 years. More and more investors have begun to keep their faith in mutual funds in the last four and half years. During this period, the creation of folios (MF accounts) has increased steadily. Currently, MF’s country-wide penetration stands close to a miniscule 5%. Therefore, enormous scope of expansion is still there. On the other hand, some of the behemoths in the fintech industry have started entering the MF landscape. A few fintech firms have also adopted the robo advisory model for catering to the retail investors. Therefore, there is huge opportunity for the entire MF industry to experience exponential growth in the coming years.

3 Key Trends in the Mutual Fund Industry

The mutual fund industry is expecting to witness the following major trends:

1. Mass Adoption

Fund houses are extremely optimistic about the industry’s future. Their expectations have got a major boost after the AUM increased by Rs. 5.5 trillion (or Rs. 5.5 lakh crore) between March 2017 and March 2019. Paytm Money’s Whole-time Director Pravin Jadhav believes that there would be mass adoption of MFs among Indian investors, thanks to increasing digitization as well as lower minimum investment amount being promoted by platforms such as Paytm. Jadhav also said that most of the investments (around 70%) come in the form of SIPs and from the age group of 18-32 years, including the millennials. He believes lowering of the minimum investment amount has helped in increasing the adoption rate among investors. Another trend is start-ups like Kaleidofin, that have launched with the goal of providing financial inclusion to the masses, including vegetable vendors and farm labour. Such platforms use technology to provide wealth generation to low income groups, by facilitating small incremental investments in MFs.

2. SIPs will Keep Increasing

Systematic investment plan (SIP) has emerged as the backbone of the MF industry. SIP inflows increased by 158% (Rs. 3,122 crore to Rs. 8,055 crore) from April 2016 to March 2019. Investonline.in’s founder Abhinav Angirish believes that the per capita income has increased by 9.7% (CAGR) in the last 5 years and the pace is expected to continue in the coming future too. Abhinav believes that this continued per capita growth will continue fuelling SIPs and will ultimately “do wonders for the mutual fund industry”.

3. Changes in Regulatory Environment

The total expense ratio of the funds has decreased, following a string of regulations. In fact, there has also been a consequent fall in the revenues of the distributors as well as independent financial advisors. Therefore, the distributors may refrain from pushing the MF products due to lack of incentives (as the upfront commissions have been discontinued). There are high chances of drying up of lump-sum investments. In fact, the volume of SIPs may not be sufficient enough to compensate this shortfall. Some of the recent launches indicate that there might be a rise in the strategy-based ETFs (Exchange Traded Funds). Also, the distributors may try to push the insurance-cum-investment products for earning higher upfront commissions.

Conclusion

Many fund houses believe that the next wave of increase in mutual fund investments will come from rise in digitization, as well as the use of online platforms by the investors for investment. FundsIndia.com’s co-founder and COO, Srikanth Meenakshi, believes that growth in mutual fund investments in the coming 2-3 years will come from increased adoption of digital and online platforms as a means of investment by retail investors.