How demonetization affected the fund industry

By Morningstar Analysts |  13-11-17 | 
 

Mitron! The one word that set the tone for a sweeping change in the Indian economy! As the nation was winding up just ‘another’ day, the prime minister’s speech and its ramifications caught everyone by surprise.

Kaustubh Belapurkar, Morningstar India's director of fund research, looks at how the move impacted the mutual funds' industry.

The industry has been at the cusp of breakout growth for many years. The 2004-07 bull market cycle witnessed immense interest from investors in mutual funds, but the subsequent crash of 2008 left many investors with mismatched expectations. For many years since 2009, investors largely stayed away from investing in funds and only returned in 2014. The journey over the next 3+ years has been nothing short of phenomenal.  Since the demonetization announcement the quantum of flows has increased dramatically and seems to the new normal as monthly flows have been quite robust. The other pleasing factor has been the steady increase in SIP numbers and the re-emergence of retail investors especially into equities.

Industry AuM growth

Industry AuM which crossed the Rs 20 trillion mark in 2017 and has more than doubled since 2014. Since the demonetization announcement the overall industry AuM is up 32% and continues to grow at a rapid pace. All segments of the market have shown immense growth, but retail investor participation and flows into equity  and balanced funds are the two stand out trends over the last few years.

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Preferred fund categories

Since demonetization flows into mutual funds have been very strong, especially in equity and balanced funds.  From November 2016 to October 2017, equity funds have received inflows of Rs 1.35 lakh crore and balanced funds have received Rs 74,000 crore. This represents a huge jump in the flows received in these categories a year prior to demonetization. While the flows under “Income funds” as reported by AMFI have remained tepid, that is result of volatile institutional flows into the “UltraShort Bond Fund” category. Short-term funds and credit funds have been receiving healthy inflows since demonetization.

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Individual investor trends

Another trend that is observed is the increasing participation from retail investors and B-15 cities, as greater proportion of savings start getting deployed into financial assets.  Individual investors accounted for 45.4% of overall assets in Oct 2016; this now stands at 48.5% in Sep 2017. In mature markets like the U.S., retail investors typically constitute a majority of the mutual fund assets.

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Individual investors have been fairly active over the last few years and increasingly so in the last one year. They have increased allocations to mutual funds as awareness around mutual fund investing increased as well as the relative unattractiveness of traditional investment avenues like real estate and gold.

Individual investors increased assets in all asset classes, but equities were the favoured asset class, which saw a 46% increase in AuM from individual investors. This has resulted in a shift in the asset allocation towards equities from 59.6% in Oct 2016 to 64.3% in Sep 2017.

Individual investor AuM by fund type (Rs/trillion)

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AuM split by T-15 & B-15 (Rs trillion)

AuM from B-15 cities (largely individuals) increased their allocations to funds proportionately and currently account for 17.7% of the overall industry AuM as on Sep 2017, up from 17% in Oct 2016 prior to demonetization. B-15 cities have been witnessing a lot of activity around investor awareness and demonetization was a much needed shot in the arm to help spur investments from smaller centres. We expect these numbers to only go up as more and more investors come into the fold.

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Source of data is AMFI

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