How Long will the Momentum of Mutual Fund Industry Continue?

In 2010 when a 100-year-old Grace Groner died, she left $7 million for charity. Where did a woman who was orphaned at the age of 12, who lived alone in a one-bedroom house, and who worked all her life as a secretary get all that money from?

Grace took humble savings from a meager salary, writes Morgan Housel in his wonderful essay The Psychology of Money, “and enjoyed eighty years of hands-off compounding in the stock market. That was it.”

Only in investing such stories are possible and believable. The possibility that the power of long-term compounding offers is irresistible. Maybe this is what is finally making sense to the Indian investor. And the evidence is the unprecedented level of participation by retail investors.

AMFI (Association of Mutual Funds in India) data shows that the MF industry had added about 9.74 lacs SIP accounts each month on an average during the FY 2018-19, with an average SIP size of about Rs 3,200 per SIP account. Not only that, the monthly SIP inflows have steadily increased in the same period — from Rs 6,690 crores in Apr’18 to Rs. 7,985 crores in Nov’ 18.

What makes this number remarkable is the economic background in which this growth has materialized. In 2018, the financial markets have been volatile, uncertain, and at times unforgiving. Although S&P BSE Sensex has gained about 5-6 percent in this calendar year, the equity funds have tested the patience of most investors. Large-cap funds are down by an average of 4 percent, multi-cap funds by 7 percent, mid-cap by 14 percent, and small-cap funds by a whopping 21 percent. That should have punched a big hole in the trust that investors have put in the financial markets. But it didn’t.

Introduction of LTCG (long-term capital gains) tax on stocks and equity mutual funds should have taken away the momentum but it looks that Indian investor has acknowledged the fact that long-term wealth creation shouldn’t be at the mercy of optimizing the tax outgo.

Finance industry forms 40 percent of the BSE Sensex, which has never happened before. As an industry grows, it attracts its fair share of profiteers, scammers, and truth-benders promising the moon. No wonder SEBI has been on a crusade to curb misspelling of financial products and making the industry safer and fairer for the retail investors. The reduction in total expense ratio (TER), the categorization of funds, mandating direct scheme for all funds, etc. are great initiatives, which will go a long way in building trust in investor’s mind towards mutual funds.

As of November 30, 2018, the AUM (Assets under Management) for Indian Mutual Fund industry stands at Rs 23.6 lakh crore. And AMFI estimates that this figure will cross Rs 25 lakh crore before the current financial draws to a close. NS Venkatesh, chief executive officer at AMFI, says, “We will see more inflows coming into the market, especially from the retail side.”

According to AMFI, this month was also the 54th consecutive month of an uninterrupted rise in the number of investor folios. With close to 8 crore folios spread across 1.5 crore investors today, mutual fund investing in India is showing clear signs of the start of an attention-grabbing trend.

Facts reveal that institutional investors dominate debt and liquid funds whereas equity oriented funds predominantly have individual investors. That could be because retail investors are yet to become comfortable with debt funds as a place to park their cash. Blame it on the events like the IL&FS debacle.

Technology is a great enabler and there are no two ways about it when it comes to retail investing. With technology, investing today has become as easy as buying groceries and the friction has plummeted so much that one can invest even Rs 100 in a mutual fund with a click of a button (or swipe of a thumb).

Will this trend of rapidly increasing retail investor participation continue unabated into 2019? Does the upcoming general election augur well for the mutual fund industry or will it be the last straw in materializing the fears of a long due market crash?

Someone asked J. Krishnamurti, an Indian spiritual teacher, the secret of his mental tranquility and he said, “You see, I don’t mind what happens.” There’s a lot of wisdom in those words for the investors too.

Going by historical charts, the only conclusion one can draw is that general elections inject volatility in the markets. Sometimes it’s a euphoric upswing and at other times, a dizzying correction. However, what remains unaffected are the long-term returns.

Taking a leaf out of Grace Groner’s book, investors should understand compounding should not be interrupted unnecessarily. And if that happens, AMCs should gear up for discovering investing opportunities to deploy thousands of crores that will continue to flow in the mutual fund industry in 2019.

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About Harsh Jain

Hey, the article is to be attributed to Harsh Jain, Co-founder & COO of Groww.
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