MFs thriv­ing & bound to go places

Two in­dus­try ex­perts ex­am­ine the growth in in­vest­ments in mu­tual funds and the fu­ture out­look:

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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.

TIER 2,3

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.

BET­TER RE­TURNS

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.

GROWTH STAGE

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.”

Laxmi Iyer

Prakarsh Gag­dani

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