The Indian mutual funds industry is on track to achieve remarkable milestones in 2023, marking what is anticipated to be a blockbuster year. Key achievements include a record surge in assets under management (AUM), the addition of over 20 million new investment accounts, and a planned return of BlackRock Inc., the world’s largest money manager. This surge has been driven by a growing appetite for financial investments among millions of young Indians equipped with smartphones, leading to a 19% increase in fund assets over the first 11 months of the year, as reported by Morningstar Inc. This performance outpaces that of major peers like the US, Japan, and China.
The pandemic has sparked a boom in retail investing, significantly contributing to this growth. As India’s equity market continues its upward trajectory, with benchmark indices poised to cap an unprecedented eighth consecutive year of gains, industry veterans believe that mutual funds will claim a larger share of household financial assets. Currently, the share of mutual funds is less than 9% compared to approximately 45% for bank deposits, indicating substantial room for growth.
“This year has been a turning point, a major qualitative shift,” remarked Dhirendra Kumar, head of Value Research Ltd., a New Delhi-based independent investment research firm. “We have seen a democratization of investments in the sense that anyone who isn’t taking part feels like he or she is missing out.” This democratization is evident as individuals across various demographics actively engage in equity investments.
Equity Funds Driving Growth
The upswing in mutual fund assets has primarily been driven by equity funds. Factors such as rising financial literacy, increasing incomes, and a move away from traditional investments in physical assets like real estate and gold have contributed to this shift. The pandemic further accelerated this trend, as Covid-19 lockdowns and job losses left millions at home with time to invest. The stellar returns from the stock market have also acted as a magnet for new investors.
Local equity funds have witnessed an unbroken inflow for 33 consecutive months through November, with monthly recurring plans emerging as the most favored products among retail investors. Flows into these plans have seen a compounded annual growth rate exceeding 25% since the pandemic began, with November alone attracting a record inflow of $2.1 billion, according to Bloomberg Intelligence.
Money managed by Indian funds now constitutes about 16% of the South Asian economy, a proportion that has doubled over the past decade. Amarjeet Singh, a whole-time member of the Securities and Exchange Board of India (SEBI), highlighted this growth at a recent conference in Mumbai, noting that there are currently only about 40 million unique mutual fund investors in a country with over 1.4 billion people. This statistic underscores the vast potential for further growth in the industry.
Industry Maturity and Resilience
While the mutual fund industry has experienced spikes in retail purchases during previous bull markets, what distinguishes this period is the consistency and sustainability of the inflows. “The mutual funds industry has come of age,” stated A. Balasubramanian, MD and CEO of Aditya Birla Sun Life AMC Ltd. He expressed surprise at the enduring nature of these fund inflows.
This steady influx of domestic money has provided a buffer against the impacts of foreign outflows, allowing Indian equities to rise even in 2022 when global funds withdrew a staggering $17 billion due to tightening concerns from the Federal Reserve. The true test of investor resilience, however, will come if a global or local market shock occurs, potentially challenging their appetite for equities.
“The fund inflows have become to the market what current and savings accounts are for banks,” noted Vidya Bala, co-founder of Primeinvestor.in. The advent of technology has made access to mutual funds significantly easier, allowing individuals more control over their investments compared to the cumbersome procedures of the past.
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Future Prospects and New Entrants
The growth prospects in India’s mutual fund industry continue to attract new entrants. Fund houses sponsored by Zerodha Broking Ltd. and Nextbillion Technology Pvt., which manage the two largest Indian brokerages, launched their first products this year. Additionally, Bajaj Finserv Mutual Fund and Helios Mutual Fund debuted, bringing the total number of fund houses in India to 44.
BlackRock’s anticipated return to India’s fund management sector, after exiting in 2018, further underscores this growth. In July, the firm agreed to form a joint venture with Mukesh Ambani’s financial services unit, signaling confidence in the Indian market.
“To scale the prosperity ladder quickly, financialization of savings must happen rapidly,” emphasized Vishal Jain, CEO of Zerodha Fund House. He highlighted the vast potential to boost retail participation by offering simple, transparent, and affordable products.
As India’s mutual funds industry experiences unprecedented growth, the combination of favorable market conditions, technological advancements, and an expanding investor base paints a promising picture for the future. With sustained interest in equity investments and new entrants continually shaping the landscape, the potential for continued expansion in this sector remains immense.
