Key mutual fund trends observed in March 2024

MUTUAL FUND STORY IN MARCH 2024

The month of March 2024 saw the overall mutual fund AUM fall to ₹53.40 Trillion, compared to ₹54.54 Trillion as of the close of February 2024. That was more due to the sharp sell-off in debt funds to support treasury withdrawals. As of the close of March 2024, the average assets under management (AAUM) stood at ₹55.01 Trillion. SIP flows in February March touched a record ₹19,271 Crore, even as FY24 SIP flows fell tad short of the ₹2 Trillion mark. NFO (new fund offering) flows were relatively modest at ₹4,146 Crore, dominated by active equity funds; especially thematic funds. The big cause of joy was the SIP folios touching 8.40 Crore and SIP AUM at ₹10.72 Trillion as of end March 2024.

The Association of Mutual Funds of India (AMFI) has just released its monthly report on the key industry level MF trends for March 2024 across various categories. They pertain to overall AUM of mutual funds, the mix and colour of AUM accretion and the nature of investors. In addition, the AMFI has also embellished the report with value-added analytics like ageing of equity fund investments and average holding period. The report also underlines some key trends like shift to passives, shift to specific categories of funds etc.

KEY TRENDS IN MUTUAL FUNDS – SEGMENT LEVEL (MARCH 2024)

Mutual fund segment level trends for March 2024 are confined to a macro level and have more to do with the colour and direction of the flows into specific fund classes.

• Average assets under management (AAUM) of all mutual fund schemes combined, touched a life-time high of ₹55.01 Trillion as of the close of March 2024, higher than the AAUM of ₹54.52 Trillion as of the close of February 2024, ₹52.89 Trillion as of the close of January 2024, and ₹51.09 Trillion as of the close of December 2024. That translates into dollar AUM of $660 Billion. The AAUM in March 2024 was higher, despite the closing AUM in March being lower than in February 2024. The AUM accretion in equities in March 2024 was a mix of index appreciation and fresh flows. However, the overall picture was distorted due to the massive outflows from debt funds in March 2024. On a yoy basis, the mutual fund AAUM has grown by a healthy 37.35% compared to March 2023. The bull rally of last one year also contributed to this accretion in AAUM, despite debt funds selling off.
• In the last couple of years, we have seen a gradual shift in the overall AUM mix from active debt to active equity. In March 2024, active equity funds gained AUM share as did passive funds as compared to February 2024. However, active debt funds and liquid funds saw loss of market share MOM. This can be attributed to the sharp appreciation in equity funds, combined with robust inflows. The equity share accretion was also due to the sharp fall in the AUM of debt funds in March 2024. As a result, active equity fund share surged by 40 bps from 57.4% to 57.8% over February 2024 while it is up 620 bps on yoy basis. Passive fund share was up by 20 bps from 12.7% to 12.9% over February 2024 while it is down 20 bps on yoy basis. Active debt funds share was down by 20 bps from 16.5% to 16.3% over February 2024 while it is down 330 bps on yoy basis. Finally, let us turn to liquid / money market funds. The share was down 40 bps at 13.0% in March compared to 13.4% in February 2024, while it is down 280 bps on yoy basis compared to March 2023.
• The share of debt fund AUM was not only hit by higher returns on equity funds in last couple of years, but also the massive redemption of debt funds in the March 2024 quarter. Normally, the corporates rush to redeem their liquid fund holdings around each quarter to pay for their advance tax payouts and the GST payouts. But, there are other reasons for the debt fund redemptions, some of which are more fundamental. As per the 2023 Finance Bill, funds with less than 35% of exposure to equity will be treated at par with fixed deposits. That means; even if they are held for more than 3 years, they would still be taxed at the peak applicable rate and the benefit of indexation of gains will not be available. Another factor driving flows into longer term debt funds is the expectation of RBI cuts rates, which looks unlikely to happen till the time the elections are over, a new government is in place and the full budget is presented by the new government. Equity market volatility resulted in arbitrage funds attracting interest. Passive funds, comprising of index funds, equity index ETFs, debt index ETFs and fund of funds (FOFs) saw market pick up in the month. This is the eighth month in a row that market share of passive funds has been under 13%, but it is getting closer.
• Are individual investors playing a bigger role in mutual fund AUM as compared to institutional investors; a perceptible trend in recent months? If you look at the AUM share, the answer is fairly unequivocal and this can be largely attributed to the surge in SIP flows, especially from the Gen-Z and millennial investors into mutual funds. The reduced interest in debt funds can also be cited as a factor. In March 2024, gross SIP flows were at a record high of ₹19,271 Crore; a fine barometer of retail appetite for equity funds. Between March 2023 and March 2024, the share of individual investors in the overall AUM composition has gone up by 240 basis points from 58.1% to 60.5%. Even, on MOM basis, the share of individuals in mutual fund AUM has gone up by 20 bps from 60.3% to 60.5%; which is despite the market fluctuations in March 2024. At the same time, the share of institutions and corporates in the overall mutual fund AUM has fallen over the last one year from 41.9% to 39.5%. It was only in December 2023, that the share of retail crossed 60%; and that has been maintained since.
• How much have individual investors allocated to each of the various categories of mutual funds like debt, equity, liquids, and ETFs? As of March 2024, individual investors have a share of a mere 40% in debt oriented schemes and 13% in short term money market schemes. These are treasury products where demand largely comes from corporates and financial institutions. Individual investors have an imposing 88% share of equity fund assets. Surprisingly, individuals have just 10% of passive fund AUM (index funds and ETFs). Retail investors are not leveraging passive products sufficiently.
• Let us turn to the individual investor allocation basket; meaning how much they have invested of their corpus in various asset classes. As of March 2024, individual investors have 84% of their mutual fund assets in equity schemes and 11% in active debt funds. Liquid funds at 3% and ETFs at 2% are fairly small in comparison. Institutional investors and corporates have 29% of their corpus in liquid funds, 29% in ETFs / FOFs, 25% in longer period active debt funds and 17% in active equity funds.

As of the close of March 2024, overall assets of mutual funds in India have grown by 37.36% yoy. Assets of individual investors in this period grew by 43.16% while the growth in assets of institutional investors stood at a subdued 29.32%.

KEY TRENDS IN MUTUAL FUNDS – FOLIOS AND TICKET SIZES (MARCH 2024)

Folios are investor accounts unique to an AMC. Folios do not represent unique investors, but are a good barometer of retail intensity.

• There were total of 17.79 Crore folios as of the close of February 2024 of which retail investors accounted for nearly 91.3% of the total folios. In addition, HNIs accounted for 8.0% of the folios while institutions accounted for the balance 0.7% of the total folios. These ratios have also been static over last few months. However, the retail share of folios comes down drastically when we look at active debt funds. Here, retail investors account for just 68.5% of the folios, while HNI investors account for 29.1% of the folios. HNIs also have a high share of folios of liquid funds (19.9%) and hybrid funds (23.6%). The latter category is targeted at the savvy HNI investors. HNIs have 5.1% of folios in index funds, but just 2.1% in ETFs.
• Here is a longer term perspective. Between March 2009 and September 2014, the number of mutual fund folios had contracted from 4.76 Crore to 3.95 Crore. However, between September 2014 and February 2024, the number of mutual fund folios have jumped sharply from 3.95 Crore to 17.79 Crore. That is a jump of 350.38% in folios since the year 2014. The financialization of savings becomes apparent when you consider that folios grew in last 10 years at a CAGR (compounded annual growth rate) of 16.24%.
• There are two takeaways on folios and retail holding period. Firstly, average ticket size is sharply up at ₹3.08 Lakhs from ₹2.76 Lakhs last year. The average ticket size for equity oriented funds is at ₹1.93 Lakhs while for debt oriented funds it is ₹15.77 Lakhs and for liquid funds it is ₹19.84 Lakhs. One interesting trend is that the average account size of the retail investors has also gone up from ₹0.72 Lakhs last year to ₹0.85 Lakhs this year.
• The general presumption is that retail investors tend to be less patient about investments. However, the average folio holding tenure contradicts this theory. Retail investors do not adopt a myopic approach to equity funds. As per data of March 2024, retail investors hold 53.1% of equity fund assets for more than 2 years. This is up from 43.7% in 2022. Nearly 72% of the equity AUM of individuals is held for at least 1 year.

In a sense, the surge in the individual investor share is linked to SIP flows, while the stickiness has to do with the tough lessons learnt post the pandemic.

KEY TRENDS IN MUTUAL FUNDS – GEOGRAPHICAL MIX (MARCH 2024)

Mutual fund distributors often narrate how there is lot of traction for mutual funds in the semi-urban pockets. Much of the incremental demand is coming from outside the large metros. This shift is being driven by the discipline of SIP flows. The real mutual fund action is in tier-2 and tier-3 cities. Most small-town investors are now looking beyond gold and realty.

• The mutual fund market is divided into T30 (top-30) cities and B30 (cities beyond top-30). If you compare March 2024 with February 2024, total T30 assets are higher by just 0.82% at ₹45.18 Trillion. Total assets of B30 centres increased by 1.18% to ₹9.83 Trillion in March 2024. The trend is ambiguous since most of the AUM accretion for both categories came from index appreciation, but folios are growing faster in B-30 cities.
• The B30 cities preferred equity assets as compared to T30 cities in March 2024 at 84% compared to just 52% in the T-30 cities. This is because most corporates and large institutional treasuries are based in T-30 centres. This makes the debt mix skewed towards large cities, where institutions, banks and corporates are headquartered.
• For a more granular picture of the T30 / B30 story, let us look at individual assets rather than total assets for March 2024. Nearly 26.48% of Individual assets as of March 2024 are located in B30 cities and 73.52% in T30 cities. The B30 cities are already more than a quarter of the sizable Indian mutual fund market.
• SEBI banned entry loads in 2009 and introduced Direct schemes in 2013. However, while 43% of the overall assets came through the Direct route, only 23% of the retail investors money came through the Direct route. HNIs are slightly better at 27%.

In the last few months, the AMFI monthly trend report has shown a shift of retail assets from beta assets to alpha assets. In March, there was a reversal into beta assets. April could throw up an interesting trend.