Beginning of Analysis
In the last two decades, Assets Under Management (AUM) of mutual funds have increased by leaps and bounds. The headline in pinks paper read likes “AUM of mutual funds has increased by 10% in the last quarter it is now 25 lakh crores”. Have mutual funds really become so popular that everyone and his aunt are investing in it.
If we go by pure numbers, we can easily say mutual funds have really become popular. As chart 1 below suggests.
Between March 2005 and September 2020 AUM of mutual funds has increased from Rs. 1.49 lakh crore to Rs. 27.75 lakh crores. AUM has grown 18.55 times in the last 15 and a half years.
“This kind of growth shows that the popularity of mutual funds has increased”. This will be the conclusion of the normal analysis. Should be satisfied with the normal analysis that normally appears in pink papers. What about comparing AUM to GDP that gives more relevant information as the overall gross domestic product has also increased in this period. Chart 2 shows the size of the economy (GDP at Market Price)
Between 2005 and 2020 nominal GDP has also increased as seen in chart 2, so the lifting boat has lifted the AUM of mutual funds and the popularity of mutual funds has not increased?
Chart 3 shows AUM as a percentage of nominal GDP/ GDP at the market price of India. AUM as a percentage of nominal GDP has increased from close to 4.7% of GDP in March 2005 to 14.63 in September 2020. It is an increase of over 2.9 times. It clearly shows Mutual funds as an investment vehicle has become popular in India.
The Future
Till now we have talked about the current and historical situation of mutual funds in India; what about its future? We don’t have a crystal ball to predict the future but we can draw some inference from other developing and developed countries.
We have used mutual funds assets to GDP (%) 2017 data from the world bank for G20 country. (Russia, Indonesia, and South Korea do not have data).
The median mutual fund assets to GDP is 44.07% in 2017. Whereas India’s mutual fund assets to GDP (%) stand at 10.76% in 2017 (chart 5). The relative size of mutual funds to GDP clearly shows mutual funds have great potential in India and as the economy grows more and more people will invest in the mutual funds.
