Are Mutual Funds the new financial intermediaries?

Historically, households in India have had a bias towards physical assets and have preferred investing in real estate and gold to financial assets like equity shares, fixed deposits, post office savings products. Even in financial assets, households have preferred bank deposits and post office products over equity shares or debentures.

However, in the last decade or so, as our economy has made rapid strides, the savings pattern of households seems to have been shifting towards financial assets in general and to mutual funds in particular.

Financial planners recommend equity, debt, gold, real estate or cash as asset classes while helping individuals reach financial goals. Going by the frenetic pace at which the MF industry has grown since 2013, MFs are slowly becoming a separate asset class themselves. When I am interacting with my students in my sessions and ask them where they would like to invest their savings once they start earning, many of them say that they would like to invest in SIPs!

I need to tell them at that moment that SIPs are not a separate asset class but are only a way of investing in MFs just like recurring deposits in Banks. Such is the popularity of SIPs (MFs) among Gen Y and AMFI (Association of Mutual Funds in India) has been trying to popularise
investment in MFs through investor awareness programmes and advertisements.

Since the “Mutual Funds Sahi Hai” (Mutuals Funds are right) campaign seems to have caught the fancy of youngsters recently, let’s look at the developments in the MF industry in the last
few years and understand why there is
a clear shift in the saving patterns of Indians away from physical assets to financial assets and within financial assets a paradigm shift towards MFs.

Mutual Fund industry has been growing at a Compound Annual Growth Rate of 25% since 2013-14 and the Assets Under Management (AUM) has grown
exponentially from Rs 9.10 lakh crore in March 2014 to Rs 24.35 lakh crore in September 2018.

Though the AUM has fallen to Rs 22 lakh crore since then, they represent nearly 20% of bank deposits.
Is the growth in MF AUM mainly due to the Sensex going up from 21,000 in January 2014 to 35,673 today after having touched a peak of 38,645 on August 31, 2018? Probably yes.

Despite the scorching pace at which AUM of MF industry has grown in the last 4 years, the penetration ratio measured by MF AUM as the percentage of GDP is still low in India compared to many developed countries. For the record, though the AUM to GDP ratio has increased from 7.3% in 2013-14 to 12.70% in 2017-18, the penetration is still low compared to 160% in the US and 75% in the UK.

How are the MFs contributing to the growth of our economy?

MFs have been playing an important role as financial intermediaries along with banks & NBFCs in the economic growth of our country in recent years as can be seen from the Table 1 above. ( Figures in Rupees crore)

They are the biggest lenders in the CBLO (Collateralised Borrowing & Lending Obligation) segment of money markets accounting for more than 60% of total lending and are providing crucial liquidity support. As can be seen from the Table 1 above, nearly 18% of the AUM is invested in liquid funds.

At a time when banks are struggling with rising NPAs and have reduced lending to the corporates, MFs have been funding the short-term and long-term fund requirements of corporates by investing in their commercial papers and corporate Bonds through income funds, which represents nearly 33% of the AUM. They have also been supporting the government’s borrowing programme by investing in treasury bills & G-Secs.

As regards, equity markets MFs have also been actively investing in IPOs of companies and helping them in secondary markets as well.

During times of volatility, they have stepped in to negate large FII withdrawals and have been stabilising the secondary markets. As can be seen from the table, equity MFs have invested Rs 10.96 lakh crore in stock markets or 6% of the market cap. The increase is due to the increased retail participation from beyond the top 15 cities to small towns thanks to a number of initiatives taken by Sebi and AMFI in the last few years.

The only negative trend is that the growth in AUM is skewed in favour of only a few AMCs. The top six AMCs out of the 40 odd AMCs have a share of more than 60% of the Rs 24.35 crore AUM of MF industry. See Table 2 below.

To conclude, MFs are not only becoming the preferred choice of investment among the youth but are also playing a key role in financial intermediation in the ecosystem along with banks & NBFCs.

(The writer is a former banker and currently with Manipal Academy of Banking, Bengaluru)