Why are Indian investors shying away from mutual funds?

Waiting on the sidelines.
Waiting on the sidelines.
Image: REUTERS/Shailesh Andrade
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After a heady run, India’s mutual fund (MF) industry seems to have lost some steam.

The assets under management (AUMs) of all MFs in India grew at a stunted 7% between April and December 2018, according to a Feb. 04 report by investments rating agency CARE.

This is a far cry from the rapid double-digit growth witnessed between financial years 2014 and 2018, when AUMs clocked a compounded annual growth rate (CAGR) of 27%. In fact, only until a year ago, in April-December 2017, AUMs grew at a healthy 21% year-on-year, according to CARE.

Most alarmingly, in the October-December, 2018 period, AUMs dipped by 2.9% quarter-on-quarter, according to another report by Motilal Oswal, released last month. This was the first fall in 20 quarters.

What led to this?

Even though investors are evidently pulling out, analysts say it is triggered by current, temporary market scenarios, and does not represent a structural shift away from mutual funds.

“In the last year, the Reserve Bank of India had been increasing interest rates and also signaling higher rates. There was (a) tendency to move (money) back to banks as interest rates increased. Also with an increase in interest rates on small savings, they were preferred,” Madan Sabnavis, chief economist at CARE Ratings, told Quartz.

Another reason for the fall is the turmoil that hit India’s non-banking financial companies (NBFCs) last year.  NBFCs typically sell commercial papers, a type of debt mutual fund, and their credibility crisis supressed the inflows into these funds last year, added Sabnavis.

However, it is not just debt funds; investments into equity funds have also been tepid. During the October-December period, net inflows into equity were also the lowest since 2016 as the equity markets were volatile and did not grow at the same pace as earlier years, another analyst at Motilal Oswal told Quartz, requesting anonymity.

In 2018, the Sensex rose a mere 6.67% compared with over 24% in the previous year.

Still, equity commands the lion’s share of the MF market. As on December 2018, the Indian MF industry had a total of 80.3 million folios, out of which 76% were of equity/growth-oriented schemes, 14% were debt/income-oriented schemes, 8% accounted for balanced schemes, and the remaining 2% were exchange-traded funds and fund of funds investing overseas.

“Calendar year 2018 was a year of modest returns and elevated volatility for the Indian markets, which was particularly noticeable in the last quarter. Sentiment was bleak with the markets stormed by adverse news flashes throughout the year,” the Motilal Oswal report added.

Most investors look at how their funds have performed in the last 12 months, based on which they make their investment decisions. “Unfortunately, a lot of funds have underperformed in the one-year period due to market volatility, which ended up triggering redemption decisions for a few investors,” said the chief investment officer of a mutual fund house, requesting anonymity.

Despite the sluggish growth in the last year, the mutual fund industry is not very perturbed. India’s  AUM-to-GDP ratio was just 14% in financial year 2017, compared with the world average of 53%. This means the industry still has ample room for growth.