The pandemic has been the biggest catastrophe of the century which challenged humanity at unprecedented levels. It taught the value of planning and financial sufficiency. It was a grim awakening towards preparedness that will reverberate for generations to come. These adverse times have prompted investors to think beyond traditional approach and explore more ways to create wealth. Equity was a natural progression in the evolution of investment philosophy. Accordingly, number of Demat1 accounts in India tripled to 12.35 crore as of July’23 from 4.09 crore in March’20.
Indian DII and individual retail investors have played a pivotal role in steady growth and strength of Indian equity markets. The Asset Under Management (AUM)2 of only Equity oriented Mutual Fund has increased more than two times to Rs 18,24,594 crores between March’20 and July’23. To put it simply, Nippon India AMC is now the size of combined AUM of all Large Cap and Multi Cap funds in Mar’20. The Equity markets are healthy, but how have the Mutual Funds fared? Table below illustrates Returns3 of Equity mutual funds across market caps.
| Category | 3 yr | 5 yr | 10 yr |
|---|---|---|---|
| Equity: Large Cap | 20.95 | 11.61 | 14.21 |
| Equity: Mid Cap | 30.34 | 16.47 | 21.65 |
| Equity: Small Cap | 36.97 | 19.09 | 23.78 |
Despite staggering numbers we have just scratched the surface when it comes to adopting Mutual Fund investing. Economic and Demographic data suggests that Mutual Fund industry in India is poised for exponential growth if we alter some of our behavior patterns. Let’s look at these in details.
Economic Data:
| 25% | Individual Mutual Fund investors are merely 25% of total Demat accounts at 3.5 crores4. |
| 4% | Percent of Mutual Fund investors of working age population of 87 crores5. |
| 30% | More companies listed on NSE compared with March 2020. In fact, only in July 2023 21 IPOs1 were launched mobilizing Rs 3610 crores in the market. This allows new investment opportunities to fund houses fueling growth and value creation. |
| 23 | P/E ratio of NIFTY as of July 2023. Interestingly, the P/E was at 30 during the same period in 2020. This indicates that valuations are not expensive despite hefty returns leaving room for further upwards movement. |
| 70% | Expected increase of per capita income of India to $4000 as per a Standard Chartered report. More income means more investible surplus. |
Behavior patterns hindering Mutual Funds investments:
- As a society, we always trusted in debt instruments more such as Fixed Deposit, Recurring Deposit etc. This is called Familiarity Bias. While there is increased interest in Equity now, overall Equity investing is still considered gambling not sophisticated & structured.
- Heavy dependence on Provident Fund, especially within salaried population, for retirement corpus. Certainly it’s tax efficient and comes with sovereign guarantee, but is also considered a convenient option due to deduction at source. Mutual fund SIP can also inculcate the same saving discipline. As for returns, while there are no guarantees in equities, the long-term returns (see Table 1 above) paint a promising picture.
- Mixing tax saving and insurance with investments. Due to personal income tax structure, we tend to invest in cost heavy-low returns instruments like insurance policies, real estate etc. For tax benefits, ELSS Mutual Funds are a great option.
- Extremely strong Loss Aversion. Investors tend to stop and /or redeem their investments at slightest loss or profit. Net inflow2 in Equity Oriented Mutual Funds stood at Rs 7626 crores, 35% less than Mar’20. Redemption is necessary when a goal is achieved or there is capital requirement, but there is a general tendency to exit Mutual Funds at the first opportunity.
- There is anecdotal evidence that average age of an Equity investor is coming down (35 or below). But the young investors today need instant results. Mutual Funds are vehicles for long-term wealth but grow at a steady pace which doesn’t attract younger investors. Instead, these investors are being drawn to Stocks and F&O trading. They sound exciting but come with very high risk and volatility.
Conclusion
No investment is 100% safe, but it must be acknowledged that Mutual Funds are riskier than traditional debt instruments. However, Indian regulator SEBI is very active and has done an impressive job in making Mutual Funds highly transparent and safe from fraudsters. Among equity instruments, Mutual Funds carry least risk due to stringent regulations of SEBI. There are various funds available to suit investors of different need, risk appetite and time horizon. More and more people should join the Mutual Fund bandwagon and spread awareness. Let’s join hands together to democratize Mutual Funds investing and make Indians & India wealthy and wise.
References:
- Securities and Exchange Board of India (SEBI)
- Association of Mutual Funds in India (AMFI)
- Value Research Online
- Edelweiss AMC report (https://www.businesstoday.in/mutual-funds/story/mutual-funds-in-india-despite-14-crore-folio-count-actual-investor-count-just-35-crore-375873-2023-04-03)
- Ministry of Statistics and Programme Implementation of India
