The Indian equity market has experienced a positive momentum over the past few months. With the bulls taking charge of the stock markets since April, benchmark indices like S&P BSE Sensex & Nifty 50 soared further and finally broke through the previous all-time highs in the month of July & August 2023.
The asset management industry in India is experiencing brisk growth in assets under management driven by financialisation and expectations for further penetration into an untapped growing population. Over the decades, mutual funds in India have been gaining popularity, as investors seek to diversify their portfolios and benefit from the expertise of professional fund managers.
The Indian mutual fund industry touched an all-time high AUM when it crossed the Rs 40 lakh crore mark in 2023.
Data as on September 26, 2023
In July 2023, the total mutual fund AUM passed the Rs 46 trillion mark for the first time. Subsequently, these gains continued into August 2023, the mutual fund industry saw a combined average AUM closed at Rs. 46.94 trillion.
Additionally, the mutual fund sector experienced new highs across a number of important data indicators, including (Systematic Investment Plan) SIP contribution, SIP AUM, and SIP accounts.
According to AMFI data, the number of mutual fund SIP accounts stood at 6.97 crore (69.7 million), and as of August, the total revenue collected through SIP for the FY 2023-24 is Rs 74,270 crore. The total SIP AUM is presently Rs 8,47,131 crore.
The SIP in flows surpassed the Rubicon of Rs 15,000 crore in July 2023, and they further consolidated to Rs 15,814 crore in August. Additionally, in terms of NFOs (new fund offering) August has been a productive month with inflows at over Rs 7,000 crore, more than 70% of these NFO flows came from equities fund flows.
Since the industry’s inception in 1963, there have been numerous reforms and regulations put in place to safeguard the interests of investors. The financial climate today offers different investment opportunities than it did in the past.
Many seasoned investors frequently approach the markets with a long-term perspective, employing short- and medium-term volatility to invest in the themes they believe will succeed over a long period of time.
However, it might be challenging to determine how to invest for the future due to volatile markets and shifting economic situations. Megatrends that are developing in the market have the ability to produce long-term growth independent of changes in interest rates, inflation, and market volatility.
The investment world is transforming as a result of several key trends. While it might be challenging for novice or less experienced investors to spot these trends, ignoring the market noise and assessing the trends’ fit for your portfolio can help you gain substantial returns.
Here are few of the most popular ongoing investment trends in the mutual fund industry that show significant potential for growth in 2023 and beyond:
1. Shift towards Passive Investing
While actively managed mutual funds continue to dominate the industry, there is a growing trend towards passive investing.
The popularity of passive funds in India has been on the rise, these funds track a specific index and aim to replicate its performance, with lower fees and expenses than actively managed funds. In India, passive funds’ AUM has increased significantly, reflecting investors’ preference for lower-cost investment options.
Data as on September 26, 2023
Over the past five years, passive funds have experienced a significant transformation in the mutual fund sector. The total AUM of all passive funds at the end of the fiscal year 2018 was approximately Rs 83,000 crore. By April 2023, it had increased and surpassed the Rs 7 lakh crore barrier, growing 8.5 times in just 5 years at a CAGR of 54%.
Many of you could come to the conclusion that investors’ interest in passive funds is primarily motivated by active funds’ poor performance relative to their respective benchmarks. It’s accurate to a point, but not fully.
In the past, the majority of passive equity funds only followed a small number of industries, including banking, and large-cap indices like the Nifty 50 and S&P BSE Sensex. To help investors build a well-diversified portfolio, mutual funds have lately introduced passive funds that monitor several categories (Equity, Debt, Gold), themes (ESG, Global), industries (Pharma, IT), as well as overseas passive funds that track indices like the Nasdaq 100, etc.
Additionally, passive funds offer low-cost investment options for clients who want to achieve respectable returns from equities but dislike high volatility. As there is no fund manager or stock selection bias, passive funds are excellent for novice investors who are just beginning their investment journey. As the market matures, we can expect a further shift towards passive investing.
2. ESG Investing
Environmental, Social, and Governance (ESG) investing has gained popularity across the globe and is anticipated to increase in India. Investors are placing more and more emphasis on backing businesses that share their values and make beneficial contributions to the environment and society.
In the years to come, it is projected that there will be an increase in ESG-themed mutual funds and increasing investor participation as more Indian companies embrace sustainable practises and disclosure rules improve. The global pandemic’s disruption and unpredictability sparked a resurgence of interest among consumers, employees, and investors in companies that prioritise ESG practices.
By embracing responsible business practices, shares of sustainable corporations tend to be more resilient than their peers. Many investors are focused on investing in thematic mutual fund schemes based on ESG and Electric Vehicle (EV) revolution parameters. Also, in schemes having high allocation to stocks of companies engaged in renewable energy, EV batteries, etc.
Passive funds that follow an index comprising top ESG companies is one approach to invest in socially responsible businesses.
Many firms are redefining the function of business in society by concentrating their efforts on lowering carbon emissions, minimizing waste, addressing social issues, and promoting equality, equity, and inclusion, among other noble causes.
Although, ESG investing trend in Indian market is at a nascent stage, it has a good growth potential considering the government support with Production-linked Incentive (PLI) schemes that encourage organisations to adapt ESG parameters, promote usage of EVs, etc.
Thus, as the market grows, the ESG investing trend could catch a momentum, investors must ensure their suitability before investing in such themes.
3. Artificial Intelligence
Artificial Intelligence (AI), which was previously just imaginable, has gained prominence in society as a result of the technological revolution. Since AI is transforming so many facets of our life, it has the potential to become the most influential industry of the century.
Capital markets are being revolutionised by AI, which is also driving the second wave of innovation in the finance industry following the digitalization of financial transactions. In India, the mutual fund business is actively embracing technology to improve customer service and streamline the investment process.
The modern digital era is still relevant for mutual funds. The fintech boom has made it easier than ever to invest in mutual funds, while methods like AI and machine learning are revolutionising the investment process.
Artificial Intelligence (AI) appears poised to drive future technologies. The emergence of generative AI such as ChatGPT/Google Bard has shown the potential this technology holds. Moreover, robo-advisory platforms have gained traction in recent years, offering investors personalised financial advice depending on their risk tolerance and investment objectives.
Thanks to AI technologies like machine learning and natural language processing, fund managers are now able to use enormous amounts of data, spot trends, and make data-driven investment decisions.
Beyond automating tasks, AI is used in mutual fund management to enhance risk control and decision-making.
AI-driven investment in mutual funds…
To provide personalised investment recommendations to investors, these platforms use cutting-edge algorithms and machine learning models to analyse massive quantities of data, including market trends, past performance, and individual risk profiles.
With their user-friendly interfaces and reasonable pricing, robo-advisors and AI-powered investing platforms have democratised access to complex investment techniques, making it easier for both novice and experienced investors to improve their portfolios and achieve their financial goals.
By combining the power of technology and data-driven insights, these platforms offer efficient, transparent, and straightforward investing solutions that satisfy the evolving needs of today’s investors.
4. Inclination towards Sectoral/Thematic Funds
Every year, some sector or theme may perform better than broader indices like Nifty or Sensex. So it makes sense that investing in sectoral or thematic funds would be appealing. High returns that sectoral or theme-based mutual fund strategies may generate occasionally are alluring.
According to experts, sectoral and thematic schemes were brought to light by mutual fund investing platforms that became popular during an equity market rally post the onset of pandemic. Sectoral and thematic funds are luring the most new millennial investors into the mutual fund space even though they are regarded as highly risky due to their seasonality.
The category received the highest net inflows among all active equity schemes in FY 2023 at Rs 23,780 crore. This shows that the craze for sectoral and thematic funds may not be limited to first-time millennial investors.
Data as on September 26, 2023
Sectoral/thematic mutual funds invest in stocks of companies operating in a specific sector or theme and concentrate their portfolio in that particular market segment. Sectors such as banking, pharma, infrastructure, technology and themes like Artificial intelligence, ESG investing etc., are gaining high investor attention seeking growth opportunities.
According to industry experts, investors in mutual funds are speeding up their equity investments in sectoral and thematic funds in anticipation of substantial earnings on the backdrop of strong economic growth that would lead to increased company growth and profitability.
Sectoral and thematic funds frequently rank at the top of the returns chart, but it’s important to keep in mind that these funds are riskier than other diversified equity mutual fund options like Multicap, Flexicap, and Large cap schemes as the favourable sector and theme are constantly changing based on the volatile market conditions.
For instance, thematic mutual fund schemes that only participated in the Nifty Infrastructure Index may have produced a high return over the course of a year. However, it’s possible that years of underperformance preceded this performance. Sectoral/thematic funds have the potential for significant returns, but because of their concentrated exposure, they also carry a higher risk.
Sectoral/thematic funds are created to take advantage of the growth potential that is distinctive to each sector/theme. However, these industries and themes frequently display cyclical behaviour, and not all of them perform effectively at the same time within an economy.
Therefore, before choosing whether to invest in sectoral or thematic schemes, investors must take into account their financial goals and risk tolerance. Additionally, since these funds focus on particular sectors and themes, timing the entry and exit is critical to account during various business cycles.
Only savvy investors with a higher risk tolerance and the ability to predict the entry and exit in a market segment may consider such sectoral or thematic funds. Recently, several fund houses have launched sectoral/thematic NFOs, ensure your suitability before investing.
With increasing penetration, advancement in technology, expansion of asset classes, sectors/themes, and regulatory changes by SEBI to safeguard investors’ interest, the future of mutual funds in India looks promising.
As the industry continues to evolve, we can expect to see further developments, including the emergence of new competitors, customisation of investment solutions, and increasing participation. The Indian mutual fund industry is poised for growth in the coming years, driven by a number of factors, providing investors with a range of investment options and opportunities to meet their financial goals.
This article first appeared on PersonalFN here