Rs 50 trillion mutual fund AUM tip of the iceberg, say industry leaders

India’s mutual fund (MF) industry had almost hit the Rs 50 trillion asset under management (AUM) milestone in October when the Business Standard BFSI Insight Summit was held. Industry players believe this is just the tip of the iceberg and the next Rs 50 trillion can be achieved in the next seven years. Growth from smaller towns, digital transformation, investor education and increasing demand for investment products will drive growth, said industry leaders at the summit.

A panel discussion was held among chiefs of India’s top fund houses, including A Balasubramanian, managing director (MD) & chief executive officer (CEO) of Aditya Birla Sun Life Mutual Fund; DP Singh, deputy MD & joint CEO of SBI Mutual Fund; Navneet Munot, MD & CEO of HDFC Mutual Fund; Nilesh Shah, MD of Kotak Mutual Fund; Nimesh Shah, MD & CEO of ICICI Prudential Mutual Fund; Radhika Gupta, MD & CEO of Edelweiss Mutual Fund; and Swarup Mohanty, vice chairman & CEO of Mirae Asset Investment Managers (India).

The discussion was moderated by Business Standard Consulting Editor Tamal Bandyopadhyay. Edited excerpts:

How do you mass-market mutual funds, and what are the challenges in taking them to Bharat?

A Balasubramanian: The rate of growth in the industry and the Rs 47 trillion assets under management (AUM) itself are on the back of the push from the Indian mutual fund industry. The industry has communicated mutual fund sahi hai, making it larger than ‘mutual funds are subject to market risks’. The narrative change is visible that now investors are coming for long-term investing. We have moved away from focusing on large cities to smaller cities. Since 2012, B30 (Beyond 30 cities) has been in focus and we have given impetus to growing in the deeper parts of the country. Roughly 25 per cent of the equity AUM is coming from the B30 market. This is coming on the account of efforts put by the industry to go to the deeper markets. We have moved to even vernacular languages in our communication. Thus, people are understanding it more now. The country has also gained in digital infrastructure and mobile and UPI penetration. China took about 25 years for telecom penetration, but it took only 10 years for India. The same way, we have seen mutual funds on the back of the payment banking system. The next round of five years of growth will be much faster.

Nimesh Shah: It is spreading very fast. The campaign of ‘mutual fund sahi hai’ changed everything for us. The growth in the last three years has been our maximum expansion. In a country with 70 million PAN numbers, if we have 40 million customers, I think we have done well. I think digital has completely changed the way we have grown. Almost 62 per cent of the new customers we get come digitally. We are at more than 200 locations physically in India. Wherever we see reasonable bank deposits, we would be there. A decade ago we were 10 per cent of the banking industry, today we have moved to 24 per cent. By 2030, we will be one-third of the banking industry. The way the banking industry is growing and the way this industry is growing, we would be more than Rs 100 trillion in the next seven years. Because the product is good, the investor is reaching us through the distribution network, banking system, and digital medium. A lot of investor education programmes are also happening. We plan to continue the healthy growth.

MF AUM is almost close to SBI’s deposit base. We are doing better in technology than developed markets. Will this remain the way forward for growth of the industry?

How do you convince the hinterland for this industry?

Nilesh Shah: We need financial awareness. Jot se Jot jagate chalo, Gyan ki ganga bahate chalo has to be the motive to spread financial awareness among people. Almost 180 million Indians have traded in crypto and lost their money. Hundred million Indians play rummy, ludo and poker online and lose money. And according to Sebi (Securities and Exchange Board of India) research, 89 per cent people lose their money in derivatives. Second, we have to communicate in a language that people can understand. Also, we have the best product which is transparent and delivers. But we need distributors to take it to the hinterland. Finally, we need a level playing field in terms of transparency, disclosures, and commissions.

Navneet Munot: In 2002, we celebrated Rs 1 trillion AUM, and the journey has come thus far. 17 per cent of the AUM is from B30 cities. But that is not the right reflection of what is happening. Thirty per cent of the incremental equity inflows are from B30 cities; 40 per cent of the SIP book is from B30, 44 per cent of the folios are from B30 and 55 per cent of the new SIP accounts are being opened in B30 cities. For fintechs, as the impact of digital transformation is higher, that number of SIP accounts is more than 60 per cent. But still I would say that we have not even touched the tip of the iceberg. 

 

When the sachet movement happened in FMCG, it took several products to different segments. I think with the sachet movement of SIP, where investments can be done for Rs 100, we will see a substantial increase. It took us 25 years to talk about the power of SIP, long-term investing, and compounding, to reach $1 billion per month in SIP. The next billion took a little over 5 years. 

The J-curve happened after a lot of effort by the industry. We have a long way to go. The track record of the industry goes back 25-30 years in delivering returns. We have built credibility. No other product comes as close to transparency as mutual funds have. India is a country which is digitally enabled, aware and powered but financially underserved. We have hit the tipping point. Investor awareness has also given confidence.

Swarup Mohanty: Every industry needs an inflexion point. For us it started with demonetisation. There was a shift from fixed assets to financial assets. That got catapulted with Covid-19. Today, the country has reached the instrumental threshold of $2,000 per capita. And that’s where people start earning money. 

 

The first instinct is to fulfil desire. The process of investing has started. It took us 25 years to get 2.3 million folios before Covid. Post Covid, we have added 17 million folios. Sixty per cent of the world’s population under 30 is in this country. They are economically superior. They will have far more opinions on investing and their risk taking capability will be different. The inflection point is here. We are now adding 8-9 million folios per year. It used to take us years to do so. It is a matter of time with technology that we might start adding 40 million folios per year. 

 

When the country is poised to go from $3.5 trillion to $6 trillion, why should I take money out from this market? It is a business of conviction. There is no greater growth story than the one we are sitting in. We are fortunate to be in a 30- or 40-year structural growth story. But till that conviction seeps in each one of us, the need for investing will not arise. Any redemption you make today, unless for a need, would be wrong from a 10-year perspective. Enjoy the ride called India. Until the time this conviction is not there, that inflection point may be a little far away.

The tax advantage that debt MFs enjoyed over bank deposits has been diluted with the change this year. Within MF, people are choosing more equity schemes than debt. What has been the impact of the tax structure change?

Balasubramanian: We can never be unhappy when the government takes the call on tax issues. The largest component of the fixed income is carry—the coupon accrued in the scheme. The relevance of fixed income schemes does not go away with the change in taxation. The tax is only when you redeem, it is not getting accrued unlike deposits. It always becomes a big opportunity when the rates are high. One of the asset classes in the US is the money market funds. They have received the largest inflows. It is not because the returns are higher. The Fed has been raising rates and in India also the rates have risen. Therefore, the carry and money market funds are far better than fixed deposits. Another asset class with a combination of fixed income is hybrid. It has got multiple varieties. Most investors that are coming in the fixed income are conservative investors. The time period is longer but they do not want to take a significant risk through equity investment and therefore they look at fixed income as an option. For those investors, mutual funds have created a beautiful vehicle called hybrid funds or saving funds. This can also act as an alternative. Every cycle, we see one asset class performing better than the other. So far, equities have performed well. But we must also remember that there will be a period of consolidation, there will be a period of volatility, and a period of no returns. Therefore, the fixed income class acts like a cushion. 

 

Favourable tax structure is only an added advantage. When 10 per cent long term capital gains tax was brought for equities, we thought it would be detrimental. What we have seen is the reverse of that. The first consideration for investing is not tax but what is the purpose for investing, which asset class, and what period of investing. Taxation is the small piece of the whole pie. But that is needed for a level-playing field. What the government has been doing is periodically removing the differential advantage of mutual funds.

Amid the inflation numbers, global risks, and currency pressure, do you see any concerns for the markets?

Munot: The only thing I can say with certainty is the continuity of uncertainty. The world has not seen inflation or the level of interest rates this high in a long time. Geopolitics is highly unpredictable. We are actually in a world which is volatile, uncertain, complex and ambiguous. But if you look at India, the picture is very different. If you look at India from a growth perspective, for the next several years it will remain the fastest growing economy in the world. Very few countries  have done something like this what we have done. In the last 25-30 years, nominal GDP (gross domestic product) has grown around 10-11 per cent, corporate profits have grown around 11-12 per cent, and market cap has increased by around 12-13 per cent. In the last 30 years, when China was the biggest growth engine for the world, the Chinese investor hardly made money as the market moved 1 per cent per annum. Ability of a country to deliver higher growth, corporate sector which converts that growth into profits, and a well-regulated capital market which has converted that profit to profit that can be shared with minority shareholders and the mutual fund industry where an investor can participate even with Rs 500 per month investment in this growth hasn’t happened in many countries. And thus, I remain confident. The trick would be to not get swayed away by the volatility but have faith in the long-term growth story of India. The largest bank in the world is a Chinese bank which has assets of around $5 trillion, the largest AMC in the world is Blackrock which has double the assets than the largest bank. So, you can see where we are headed.

Why are wealthy investors more inclined towards PMS than mutual funds?

Nimesh Shah: We are all asset management companies and we have one segment for mutual funds. When we design the product and put the risk parameter to it, we are very clear that the common man of India should have a good experience. We diversify such that the risk is managed. But the same AMC also manages PMS and AIF schemes where the same risk department will be looking at alternative schemes. And, they are managed with slightly more concentration risk. If the risk is transparently explained, then the investor with a higher ticket size is welcome to come in the PMS and AIFs. There is a space for both.

We have discussed the gaps and where the Indian mutual fund stands. But when it comes to penetrating to Bharat, how do you see the industry’s growth?

Radhika Gupta: We should give ourselves tremendous credit as an industry for where we have reached. I spent a week outside India where CEOs from over 100 countries had come. They were surprised by the retail savings SIP book in India. They asked whether the government gives any incentives, a tax incentive or has any mandatory programme for this investing. None of this is true. An industry coming together and pooling assets to create something like a mutual fund in itself is one of a kind in the world. When outsiders look at it, they almost look at it with a feeling of wow. The migration from T30 to B30 is a journey. We have not even conquered the T30. We have not conquered the problem in our college alumni groups, or in our housing societies. We have a long way to go. Today we have around 1.3 lakh ARNs (distributors) in the country. We probably need 1 million ARNs if we have to take the message of the mutual fund to that many people. It will not happen with 45 AMCs.

Any message for investors, specifically on investor education?

Balasubramanian: Ensure that every neighbour of yours is investing in MFs.

Shah: We define happy customers. Ninety-nine per cent of the customers who have stayed for the last three years have got double-digit returns. That is what gives us happiness.

Singh: I hope all of us have SIPs. My message is that please don’t stop SIPs. Don’t take the money out of the SIP kitty. Otherwise your returns would be half of what you are actually contemplating. Please do not look at it as liquid money that you can take out. Whatever goal you have kept the investment for, let it continue for that.

Mohanty: There is a risk to investing but there is a bigger risk for not investing. The risk of not investing in India at this time is very large. Keep that in mind.

Munot: A disciplined investment of Rs 10,000 per month in HDFC Flexicap would have become Rs 14 crore after 28 years. I’m not saying this will get repeated but this shows the power of compounding and disciplined investment.

Gupta: In a country where there are so many divisions across economic strata, this is one industry that treats a Rs 100 investor and Rs 100-crore investor equally. When you come to purchase a mutual fund, we are the most democratic industry in the country, and this is one industry where if you want to take your money back, you will get it back in two days without making a call, visiting a bank or filling a form.

Jahan daal par sone ki chiriya karti hai basera, aisa desh hai mera. So if you want to do basera in India, then you must also invest in mutual funds.