Last week, the Association of Mutual Funds of India (AMFI) released monthly figures to share insights on the development of the mutual fund industry. There has been a growth of 8.91% in AUM from Rs. 23.21 trillion in April 2018 to Rs. 25.28 trillion in April 2019.
Graph 1: Average AUM of the Indian Mutual Fund Industry (Rs in Trillion)
Data as of April 30, 2019
Despite the growth in the AUM within a year, the number of portfolios increased to 7,97,25,429 and the number of investor accounts has shown an upward trend from December 2014. Between March 2014 and March 2019, investor accounts increased from 3.95 crores to 8.25 crore. The industry witnessed a drop in the number of investor accounts in equity investment.
Data as of March 31, 2019
There was a sharp rise in the number of equity accounts in 2016-17, but the growth slowed down in 2018-19. However, the proportionate share of equity-oriented schemes is now 42.4% of the industry assets in April 2019, up from 41.3% in April 2018.
The proportionate share of debt-oriented schemes is 29.3% of industry assets in April 2019, down from 34.9% in April 2018. Even the equity inflows whoopingly dropped by 62% to Rs 4,230 crore for the month of April 2019 from Rs 11,171 crore last year.
Graph 4: Equity inflow dipped (Rs in Crore)
Data as of April 30, 2019
The probable reasons for such a drop are:
- Speculation Over Election Outcome
As the election outcome draws in closer, the equity market is acting like a seesaw on account of speculation. If the Modi-led government comes to power, there would be a rally and if not, then the markets would plunge.
Although the quantum of gains/losses divides the opinions of market experts, nobody seems to be disputing the market’s direction under a scenario.
At present, mutual fund investors are facing a dilemma. The pre-election rally has made many of them believe that they have missed the bus. The uncertainty around who will form the government is keeping them on the fence. While some of the investors are trying to time the market and waiting for the election drama to subside.
But it has been observed that whatever the outcome of the election, its effect wears off in short time. And the focus is on fundamentals and other economic factors.
- Geopolitical Tensions
The US-China trade war gets murkier and could escalate into a global trade war. Even the delay in Brexit and the rising crude prices have a jarring effect on the equity markets. The markets were under pressure. especially the Small-cap indices and mid-cap indices. as compared to the large caps.
Corporate earnings haven’t been very encouraging; the Nifty 500 profit-to-GDP ratio is at a 15-year low. Plus, there are governance issues with a few companies. Earnings did not justify the valuations. The trail P/E of the S&P BSE Sensex is currently at 28x.
The average GDP growth rate over the last four-and-a-half years under Prime Minister Modi’s regime is around 7.3% and the fiscal deficit has widened. Recent CPI numbers show signs of slow momentum.
All this has been weighing down on the investors’ sentiments to invest in equity funds.
- Discouraged Distributor Community
SEBI’s regulatory commission norms were proposed to streamline the expense ratio and bring in more transparency to the investors to guide them in making better investment decisions. But it has discouraged the advisers by banning the upfront commission, mandated trailing commission model and implementing new total expense ratio slabs.
While many mutual fund houses have yet to come out with the new structure, the advisers are waiting and actively promoting alternate products like the insurance. That’s because the commissions earned on such financial avenues are much higher for distributors.
Instead of advising investors to keep up with their ongoing SIPs, now that the market has corrected, several advisers are mis-selling investment products. In other words, they are not placing the investors’ interest at the fore. This could further tamper the growth of the industry.
However, it is interesting that the number of equity folios has been good and there were fewer outflows in this category, which was from Large & Mid Cap Fund and Dividend Yield Fund as seen below:
Table1: Open-ended Equity inflows/outflows
|Equity Oriented Schemes||No. Of Folio||
for the period (in Rs crore)
|Large Cap Fund||8,179,430||48.27|
|Large & Mid Cap Fund||4,352,083||-20.5|
|Mid Cap Fund||6,128,989||491.04|
|Small Cap Fund||4,946,766||955.83|
|Dividend Yield Fund||505,530||-32.03|
|Value Fund/Contra Fund||4,465,360||39.69|
Data Released on 09-May-2019
Amidst all this, the recent downgrading of the corporates have also made investors more risk-averse due to the debt crisis. Most of the FMPs worth Rs 18,029 crore matured in April. Barely Rs 384 crore of this money was reinvested in the same category. And the credit risk funds saw an outflow of Rs 1,253.28 crore.
Speaking to Livemint, Mr NS Venkatesh, chief executive of AMFI, expects investors to return, as corporate earnings improve, and the general election-related uncertainty and global headwinds recede over the next few months.
“Overall nervousness in the markets owing to credit events, rating downgrades and defaults, coupled with global trade imbalance and uncertainty over the outcome of general elections, has led to investors getting into wait-and-watch mode,” he added.
PersonalFN is of the view that whatever the election outcome is, as an investor one should not wait for the results and continue investing with the help of an able adviser. And advisers should remember to give every new change sufficient time to see how it pans out and continue working ethically for best of their clients’ well fare.
To conclude, the Indian mutual fund industry would see further development only if investors, advisers and distributors demonstrate more maturity.