Mutual Funds' AUM: Charting a Path of Consistent Growth

_{Published on: 03 Aug, 2024 07:23}

• AUM of Mutual Funds has risen almost 2.4 times in the last 5 years, showing a CAGR of 19.15%. (Between June 2019 and June 2024)
• Equity Fund AUM has become almost 4 times with a CAGR of 30% in the last 5 years.
• In the same period, the bank deposits grew by only 10.92%

Before 2019, mutual fund investments in India were not as prevalent as they are today. Many investors preferred traditional saving instruments like bank deposits due to their perceived safety and guaranteed returns. However, several economic and market shifts over the last few years have significantly impacted investor behavior and preferences.

The rising investment in mutual funds has changed multiple economic paradigms, impacted bank deposit growth, reduced Foreign Institutional Investors (FIIs) power to drive Indian stock markets, and almost decoupled the Indian stock market from international markets. Several factors have contributed to this shift:

1. Increasing Financial Literacy: Over the years, financial literacy campaigns have educated investors about the benefits of mutual funds, including potentially higher returns compared to traditional bank deposits.

2. Market Performance: The equity markets have performed well, encouraging investors to allocate a portion of their savings into mutual funds, particularly equity funds. This trend is visible in the substantial net inflows into equity funds since 2020.

3. Low Interest Rates: As the Reserve Bank of India (RBI) lowered interest rates to stimulate economic growth, returns on bank deposits diminished, prompting investors to seek better yields through mutual funds​ (Reserve Bank of India)​.

4. Regulatory and Policy Support: Initiatives by the Securities and Exchange Board of India (SEBI) to streamline mutual fund investments and increase transparency have boosted investor confidence in these financial products.

5. Economic Recovery and Stability: As the economy recovered from the pandemic, investor confidence increased, leading to greater participation in capital markets and mutual funds. This was particularly evident in the post-pandemic period, where mutual funds attracted significant inflows​ (Reserve Bank of India)​​ (RBI Data)​.

 

The above figure shows the trend in average AUM since June 2019. The AUM has increased multiplefold in the last five years. For the first two years growth was modest at around 10,000 billion rupees. Since March 2023 average AUM has increased by close to 22,500 billion rupees. In the last 15 months, the average AUM has multiplied by 1.5 times which is extraordinary growth. 

Key Take Away from MF Net Inflow Data

• Around the first COVID wave in March 2020, large outflow can be seen as the market has fallen to a decadal low around that time.
• In the remaining quarters of 2020, there was a good inflow of around 2,800 billion rupees in 9 months.
• In the second wave of COVID-19, we observe a similar trend, the first quarter of 2021 saw an outflow of around 570 billion rupees, followed by around 2,500 billion rupees inflow in the remaining nine months.
•  Due to the Russia- Ukraine war, inflows were minimal in the first two quarters of 2022.
• Since October 2023, due to the expected return of the BJP government, mutual inflow increased multiplefold. The last five quarters have seen a combined inflow of over 6,600 billion rupees.

 

1. Steady Growth Over Time:

   • The chart shows a steady increase in the average AUM of equity funds over the five-year period. Starting from about ₹7,239 billion in June 2019, the AUM has more than tripled to reach ₹26,871 billion by June 2024. This growth indicates a robust confidence in equity markets and the increasing appeal of mutual funds among investors.

2. Impact of COVID-19:

   • There is a noticeable dip in AUM in 2020, corresponding with the onset of the COVID-19 pandemic. This dip reflects the initial market uncertainty and investor caution during the early months of the pandemic. However, the recovery in AUM by the end of 2020 suggests that investor confidence quickly rebounded as markets stabilized and adjusted to the pandemic environment.

3. Post-Pandemic Recovery:

   • From 2021 onwards, there is a clear upward trend, signifying a strong recovery and growth in equity fund investments. This recovery aligns with broader economic stabilization and the rollout of vaccines, which helped boost market sentiment and investor confidence.

4. Recent Accelerated Growth:

   • The sharp increase in AUM from 2023 to 2024 highlights a period of accelerated growth, driven largely by favorable economic policies followed by the central government, and the possibility of a repeat of government in the general election.

1. Volatility and Recovery:

   • The net inflow chart shows periods of volatility, particularly in 2020 and early 2021, where there are instances of negative inflows. This volatility corresponds with the economic uncertainty during the initial pandemic period, as investors reacted to market fluctuations and liquidity needs.

2. Strong Inflows in Subsequent Years:

   • Despite the challenges in 2020 and early 2021, the net inflows turned positive and remained strong throughout 2022, 2023, and 2024. This consistent positive inflow suggests a growing confidence in equity funds as a long-term investment vehicle.

3. High Inflows in 2024:

   • The net inflow in 2024 reaches a significant high of ₹941 billion, indicating a peak in investor enthusiasm and participation in equity markets. This could be attributed to favorable economic conditions, bullish market trends, and potentially attractive returns offered by equity funds.

4. The shift in Investment Patterns:

   • The increased inflow into equity funds suggests a shift in investor preference from traditional savings instruments, like bank deposits, to more growth-oriented investments. This shift is likely driven by a combination of factors including lower interest rates on traditional savings and the growing financial literacy among the Indian population.