Despite the volatility in equity markets and the fallout of credit events in the debt market, the mutual fund (MF) industry is going from strength to strength. The assets under management (AUM) of the industry reached record-high of Rs 27.85 lakh crore at the end of January 2020. That represents a 19 percent growth year-on-year (YoY). On a month on month basis, AUM rose by 5 percent.
The growth of AUM in January was aided by the surge of inflows into equity-oriented MFs, steady flows through systematic investment plans (SIPs) coupled with fund flows into liquid/ money-market segments.
Mid and small caps sizzle
Equity funds in particular saw a significant improvement in net inflows in January, up 70 percent from December and 23 percent from the same period last year.
Open-ended equity schemes saw infusion of Rs 7,877 crore while there was a small outflow of Rs 330 crore in close-ended equity plans, taking net equity inflows to Rs 7,548 crore in January.
Incidentally, a similar monthly inflow of around Rs 7,500 crore was observed in June 2019 (Please see chart), a month preceding Modi 2.0 government’s first Budget on July 5, 2019. The pattern was repeated in January as investors bought equity assets in the run-up to the Union Budget of 2020.
In the equity universe, mid cap and small cap funds saw strong inflows in January. The Nifty touching an all-time high of 12,345 in mid-January could have triggered some profit booking and withdrawals from large cap equity funds. The pattern of equity flows in January cannot be extrapolated as a trend. Just a month’s data neither implies that investors are getting disinterested in large cap funds nor that small cap funds are back in favour.
That said, market regulator SEBI is expected to relax its norms on MF investments in mid and small cap stocks at its upcoming board meeting on February 17. This can lead to some change in pattern of flows within different categories of equity funds in the coming months.
SIP – A big wave in MF industry
Among all the trends, the stability in SIP flows despite frequent bouts of volatility in the equity market has been the key success story of MFs. SIPs account for a good chunk of the monthly inflows and touched an all-time high of Rs 8,532 crore in January.
SIPs also have played a key role in bringing individual retail investors into the MF fold. It is an ideal route for individual investors as it helps overcome issues related to timing the market and enables investing in a disciplined manner. Thanks to popularity of SIPs, individual investors now hold a higher share of MF assets at around 53 percent of total AUM as of December-end, according to industry body AMFI (Association of Mutual Funds in India).
SIP inflows augur well for the industry, too, as they are more sticky than lump-sum investment and add to the predictability of AUM flows. If the current monthly run rate of SIP of Rs 8,500 crore is sustained, the MF industry will receive equity inflows of at least around Rs 1,00,000 crore in the next financial year, which is sizeable.
The assets garnered through the SIP route stood at Rs 324,868 crore in January. The contribution of SIPs to the industry’s overall AUM (equity plus debt assets) has increased from around 8 percent in August 2016 to 12 percent in January 2020.
The growing asset base from systematic investments is a win-win for both investors and the industry. SIPs have done to the mutual fund industry what the sachets did to the FMCG (fast-moving consumer goods) industry a few years ago.
Disclaimer: Moneycontrol Research analysts do not hold positions in the companies discussed here