MFs thriving & bound to go places
Two industry experts examine the growth in investments in mutual funds and the future outlook:
In just 3 years, the asset base of mutual fund industry has more than doubled. The assets under management, or AUM, has increased by 7.6% to `21 trillion at the end of September 2017 quarter, rising from `19.52 trillion during the April-June quarter. Prakarsh Gagdani, CEO at 5 Paisa Capital, a subsidiary of IIFL, explains this rise: “Mutual fund industry is experiencing exuberance. In the last one year, MFs’ asset base has grown by a record high of 31%, which is phenomenal. A large part of this growth has come from rise in SIP towards equity, which is a result of rising stock markets, high savings rate and historical superior returns.”
Laxmi Iyer, CIO-Debt & head, Products at Kotak Mahindra Asset Management, gives a broader perspective: “There is a general trend of financialization of savings that is being seen currently. In that, we are witnessing steady flows from households in India into equities and fixed income categories. For us too, it has been a similar trend - where we have seen growth in diversified equities as also corporate bond based debt strategies in the mutual fund space.”
OTHER ASSET CLASSES
There have been strong inflows in equities so far in the current FY. Gagdani explains: “Reduction in interest rates has led to FD returns sub 7.5% , which hardly covers inflation. Another asset class, gold, has also given practically no returns. In such a scenario, equity and in that SIP, looked to be the most convenient and safe option to retail investors.”
Equity SIP has grown by 50% in last 1 year with `50 billion coming only in August 2017, with a huge surge in retail participation. “I strongly feel that this momentum will not just continue but will get aggressive as the financial year ends,” adds Gagdani.
As there is a gradual shift happening from physical investments like gold and real estate, it is natural to see some movement to the financial asset classes like equities. Laxmi Iyer shares another insight on this trend: “MFs is an easy way to own part of the India pie as minimum ticket sizes are also retail friendly. Also, the average Indians are quite under owned in equities as an asset class, which has the potential to beat inflation over long periods of time.” She believes that this is a trend that would likely continue for remainder of this year.
EXPOSURE TO BANKS
Banking sector has been an integral part of the key frontline indices and to that extent has been part of MF portfolios as well. Says Iyer: “In that, we have seen private sector steadily increase market share. We remain constructive on banking sector, specifically private sector banks, as India heads towards growth path and makes available banking services to most people in the country.”
Gagdani mentions that there are select banks which find favor with mutual fund CIOs. However, there is growing interest for non-banking finance companies as well as housing finance companies from the fund managers. Banks would turn attractive once the NPA mess is over, says he.
Acquiring assets from smaller town is yet a difficult task. There is an urgent need to ensure how it can be made easy. Feels Iyer: “The relative ease of acquiring assets is improving from what it was a few years back. This has been possible due to the investor awareness programs (IAPs) undertaken by the MF industry. There also has been good amount of handholding being done by the advisory/ distributor fraternity in India to be able to achieve this cause. We believe this trend would only improve from the current levels.”
It needs a lot of financial literacy efforts. Gagdani points out that IIFL has done significant work on financial literacy in smaller towns and rural locations. It has brought out multiple books in various languages offering financial literacy to even school kids. “Recently we have launched a financial literacy campaign, IIFL DhanKiBaat, which is broadcast through various digital platforms as well as on dhankibaat.co.in. These efforts need to be sustained to achieve the desired results,” says he.
Gagdani predicts that though valuations are a bit stretched, they are nowhere near to the exuberance created in 2006-07 era. In the last 12 months, NIFTY has given 14% returns. “I personally am bullish on Indian stock market. I foresee a similar growth in the next 12 months. I expect equity driven mutual fund schemes to give better returns than this in next 12 months,” says he.
Iyer sees visible interest from domestic and foreign institutional investors alike across both equities and fixed income. She expects asset classes like equities followed by fixed income to outperform physical assets like gold and real estate.
The asset management industry needs quality advisory to go to the next level. Iyer believes that it would be difficult for the MFs to achieve this solo. Hence the outlook seems quite bright - especially as the asset management industry gears itself to offer more sophisticated investment offerings to the evolved customer.
Gagdani forecasts: “I think more and more people would go the SIP way. Retail as well many medium and high net worth investors have understood that SIP is largely the safest way to benefit from equity market. While a part of the investment would always find its way to FDs and debt, the share of equity investment and to be specific through mutual fund SIPs is going to be the norm in the medium term.”