Retail investors catalysing growth of mutual funds in India · Yet, with just 11% of AUM-to-GDP...
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Research SIP-shape Retail investors catalysing growth of mutual funds in India August 2019
Transcript of Retail investors catalysing growth of mutual funds in India · Yet, with just 11% of AUM-to-GDP...
Research
SIP-shapeRetail investors catalysing growthof mutual funds in IndiaAugust 2019
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Analytical contacts
Prasad Koparkar Senior Director, Funds & Fixed Income [email protected]
Bhushan KedarDirector, Funds & Fixed Income [email protected]
Piyush GuptaAssociate Director, Funds & Fixed Income [email protected]
Prahlad SalianManager, Funds & Fixed Income [email protected]
Kiran NateManager, Funds & Fixed Income [email protected]
Venkatramh BManager, Funds & Fixed Income [email protected]
Parth PandyaManager, Funds & Fixed Income [email protected]
Zunjar SanzgiriSenior Research Analyst, Funds & Fixed Income [email protected]
For Feedback/Suggestions please write to: AMFI – [email protected] / CRISIL – [email protected]
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Contents
9Timelines
22Regulator and industry come
together to tide over crisis
38Performance of
mutual funds across categories
14Little SIPs help
rake in big bucks
30Fintech
transforming asset
management
46Other industry
trends
55Annexure
5Message from AMFI
7Message from
CRISIL
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Last year, the Indian mutual fund industry managed over Rs 25 trillion assets, involving 20 million investors.
Retail participation continued to improve, too. Indeed, retail assets under management have more than doubled since fiscal 2016.
Systematic investment plans (SIPs) account for a good chunk of the inflows, at over Rs 8,000 crore a month today.
SIPs have done to the mutual fund industry what the sachets did to the FMCG industry a few years back. SIPs as low as Rs 100 a month, technology-backed customer onboarding that happens in a matter of minutes, increased distribution footprint through digital distributors, and simplified product nomenclature have all helped investors select the category and build trust.
Yet, with just 11% of AUM-to-GDP ratio, acceptance and adoption of mutual funds in India has a long way to go.
Efforts are being undertaken by the industry and the regulator, Securities and Exchange Board of India (SEBI), to increase awareness of mutual funds and make them a preferred investment option for long-term wealth creation.
‘Mutual Funds Sahi Hai’, an investor awareness media campaign launched by AMFI under the guidance of SEBI in March 2017, has helped make mutual funds a household name. Since the start of the campaign, the industry has added over 7 million new investors. Smaller cities and towns now contribute almost 15% of the assets under management.
Digitalisation too is helping spread awareness. Indeed, 59% of all mutual fund related queries on Google India are from non-metros. With information available at fingertips, more and more first-time investors are searching for mutual funds and investing in them online.
This fact book, compiled by AMFI and CRISIL jointly, puts out the key trends of the industry. We are grateful to the CRISIL team for their help and support in preparing this fact book.
Message from AMFI
N. S. Venkatesh
Chief ExecutiveAssociation of
Mutual Funds in India (AMFI)
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Message from CRISIL
The domestic mutual fund industry appears to have emerged stronger after the tumultuous phase it went through last year, given high volatility in the equity market and the fallout of credit events in the debt market.
The biggest positive has been a surge in retail participation through the system-atic investment plan (SIP) route, mainly in equity-oriented funds. Online search trends also suggest heightened interest among individual investors to this effect.
To be sure, SIPs are an ideal route for individual investors to enter equity funds, avoiding worries of timing the market, averaging cost, and investing in a disci-plined manner. These investors should, however, note that the effectiveness of SIPs optimises over the long run, helping reduce risks from volatility in the un-derlying market and shoring up returns.
SIP inflows augur well for the industry, too, as these instil a measure of predict-ability from the fund manager’s point of view.
On the debt side, the industry and regulator have come together over the past year to tide over the crisis that followed the credit events. Measures such as side-pocketing, move towards full mark-to-market of debt securities and reduc-tion of threshold caps for vulnerable pockets are a welcome change and aimed at adopting best practices.
Meanwhile, financial technology has emerged as a harbinger of growth for asset management companies, both in terms of customer acquisition and at the back-end. The front-end needs sharper focus, though. Also, the benefits of technology notwithstanding, there are overlapping risks such as consumer protection, data protection, lack of infrastructure and access, which need to be managed by the industry, especially in a developing country such as India.
CRISIL has been associated with the industry and capital markets over three de-cades and our analytics and solutions such as CRISIL Mutual Fund Ranking and benchmarks for debt market, widely sought as inputs for decision making. The recently launched Quantix Investment Research platform provides asset manag-ers with pre- and post-investment research.
We are honoured to partner with AMFI again for the third annual edition of the industry fact book. I hope stakeholders will find the insights useful.
Amish Mehta
Chief Operating Officer and President
CRISIL Ltd.
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Timelines
10 1963
Formationof theUnit Trustof India
1964
Launch ofthe maidenscheme ofUTI-UnitScheme
1987
Entry of publicsector fundsSBI MutualFund wasfirst onefollowed byCanbankMutural Fund
1993
Emergenceof private sectorfunds FranklinTempleton(erstwhileKothari Pioneer)was the first ofits kind
2009
Removalof theentry load
2012
l Single plan structure for mutual fund schemes
l Cash investme nt allowed in
mutual funds
l Fungibility of total expense ratio
(TER) allowed
l Portion of TER to be used for
investor education
l Entire exit load to be credited to
the scheme
l Launch of Rajiv Gandhi Equity
Savings Scheme (RGESS)
2013
l Reduction in Securities
Transaction Tax (STT) for
equity funds
l Uniform Dividend Distribution
Tax (DDT) of 25% on all debt
mutual funds
l Product labelling
l Introduction of direct plans
Robust growthand revised MFregulation fromSEBI in 1996,entry of foreignfunds, severalmergers andacquisitions
1993-2003
2014
l Changed the definition of
'long term' for debt mutual
funds to 36 months from 12
months for LTCG
l Tax exemption limit for
investment in financial
instruments under Section
80C raised to Rs 1.5 lakh
from Rs 1 lakh
2015
l Launch of MF Utility (MFU) - Digital aggregator
platform by the industry, for the industry
l SEBI asked fund houses to shift from colour
coding to Riskometer which classified schemes
based on the risk profile
l EPFO started investing in the equity market via
Exchange Traded fund (ETF)
l SEBI allowed gold ETFs to invest up to 20% of
their assets in the government’s Gold
Monetisation Scheme
l SEBI tightened norms for
mutual fund investment in
corporate bonds
l Allowed investment advisors
to use the infrastructure of
the stock exchanges for sale
and purchase of mutual fund
units
l Provided easy entry to the
foreign fund managers keen
to enter India
2018
l SEBI asked fund houses to
benchmark returns of equity schemes
against a total return index (TRI)
l SEBI introduced categorisation and
rationalisation of mutual fund
schemes making it simpler for
investor to understand
l LTCG of 10% without indexation
introduced for equity-oriented funds
for investment horizon of > 1 year,
subject to capital gains of over Rs 1
lakh per assessee per year. Dividend
plans of equity-oriented funds
subject to a DDT of 10%, deducted at
source
l Mutual fund houses asked to disclose
TER for all schemes under a separate
head on their websites on a daily
basis
l SEBI further redefined the scope for
T15/B15 cities to T30/B30 and push
for higher penetration
2019
l Industry adopt the full trail model of
commission in all schemes without payment of
any upfront commission. Upfronting of trail
commission will be allowed only in case of
inflows through SIPs for new investors to the
industry (identified by PAN), up to 1% for
maximum of three years.
l AMFI website starts disclosing fund industry
scheme industry performance data on a daily
basis.
l Additional TER of 30 bps from B-30 cities
restricted to individual investors.
l TER slabs cut by 0.25% for both equity and
debt schemes; the uppermost slab is pegged at
2.25% for equity funds having an AUM of up to
Rs 500 crore, and 2% for other schemes. In the
highest AUM slab of above Rs 50,000 crore, the
TER for equity funds would be 1.05% of the
scheme's AUM and 0.80% for other schemes.
· SEBI allows side-pocketing if debt assets are
downgraded to below investment grade.
l SEBI puts in place a robust and stricter cybersecurity
framework for mutual funds and AMCs to guard against
breaches of data leak, directs AMCs to constitute a
technology committee to review the cyber security and
resilience framework of the mutual fund industry.
l Caps weightage of a single stock in sectoral and
thematic indices, and set norms for minimum stocks an
index needs to have in a bid to protect investors from
risks related to portfolio concentration in ETFs and
index funds.
l Industry threshold for amortisation of debt securities
changed to 30 days from 60 days, proposed to move to
full MTM by early next year.
l Proposed cap on sectoral limit of 25% has been brought
down to 20%. The additional exposure of 15% to HFCs
will be restructured as 10% to HFCs and 5% to
securitised debt.
l Prescribes minimum holding of 20% in cash, receivables
and government securities to improve liquidity of liquid
funds
l Prescribes mandatory investment in listed securities
2016
2017
l SEBI allowed mutual funds to
invest in REITs and InvITs
l Allowed investment up to Rs
50,000 per mutual fund per
financial year through digital
wallets
l Instant access facility to the
liquid funds investors (via
online mode) of up to Rs 50,000
or 90% of the folio value,
whichever is lower
l Government discontinued the
tax benefits of RGESS
Research
111963
Formationof theUnit Trustof India
1964
Launch ofthe maidenscheme ofUTI-UnitScheme
1987
Entry of publicsector fundsSBI MutualFund wasfirst onefollowed byCanbankMutural Fund
1993
Emergenceof private sectorfunds FranklinTempleton(erstwhileKothari Pioneer)was the first ofits kind
2009
Removalof theentry load
2012
l Single plan structure for mutual fund schemes
l Cash investme nt allowed in
mutual funds
l Fungibility of total expense ratio
(TER) allowed
l Portion of TER to be used for
investor education
l Entire exit load to be credited to
the scheme
l Launch of Rajiv Gandhi Equity
Savings Scheme (RGESS)
2013
l Reduction in Securities
Transaction Tax (STT) for
equity funds
l Uniform Dividend Distribution
Tax (DDT) of 25% on all debt
mutual funds
l Product labelling
l Introduction of direct plans
Robust growthand revised MFregulation fromSEBI in 1996,entry of foreignfunds, severalmergers andacquisitions
1993-2003
2014
l Changed the definition of
'long term' for debt mutual
funds to 36 months from 12
months for LTCG
l Tax exemption limit for
investment in financial
instruments under Section
80C raised to Rs 1.5 lakh
from Rs 1 lakh
2015
l Launch of MF Utility (MFU) - Digital aggregator
platform by the industry, for the industry
l SEBI asked fund houses to shift from colour
coding to Riskometer which classified schemes
based on the risk profile
l EPFO started investing in the equity market via
Exchange Traded fund (ETF)
l SEBI allowed gold ETFs to invest up to 20% of
their assets in the government’s Gold
Monetisation Scheme
l SEBI tightened norms for
mutual fund investment in
corporate bonds
l Allowed investment advisors
to use the infrastructure of
the stock exchanges for sale
and purchase of mutual fund
units
l Provided easy entry to the
foreign fund managers keen
to enter India
2018
l SEBI asked fund houses to
benchmark returns of equity schemes
against a total return index (TRI)
l SEBI introduced categorisation and
rationalisation of mutual fund
schemes making it simpler for
investor to understand
l LTCG of 10% without indexation
introduced for equity-oriented funds
for investment horizon of > 1 year,
subject to capital gains of over Rs 1
lakh per assessee per year. Dividend
plans of equity-oriented funds
subject to a DDT of 10%, deducted at
source
l Mutual fund houses asked to disclose
TER for all schemes under a separate
head on their websites on a daily
basis
l SEBI further redefined the scope for
T15/B15 cities to T30/B30 and push
for higher penetration
2019
l Industry adopt the full trail model of
commission in all schemes without payment of
any upfront commission. Upfronting of trail
commission will be allowed only in case of
inflows through SIPs for new investors to the
industry (identified by PAN), up to 1% for
maximum of three years.
l AMFI website starts disclosing fund industry
scheme industry performance data on a daily
basis.
l Additional TER of 30 bps from B-30 cities
restricted to individual investors.
l TER slabs cut by 0.25% for both equity and
debt schemes; the uppermost slab is pegged at
2.25% for equity funds having an AUM of up to
Rs 500 crore, and 2% for other schemes. In the
highest AUM slab of above Rs 50,000 crore, the
TER for equity funds would be 1.05% of the
scheme's AUM and 0.80% for other schemes.
· SEBI allows side-pocketing if debt assets are
downgraded to below investment grade.
l SEBI puts in place a robust and stricter cybersecurity
framework for mutual funds and AMCs to guard against
breaches of data leak, directs AMCs to constitute a
technology committee to review the cyber security and
resilience framework of the mutual fund industry.
l Caps weightage of a single stock in sectoral and
thematic indices, and set norms for minimum stocks an
index needs to have in a bid to protect investors from
risks related to portfolio concentration in ETFs and
index funds.
l Industry threshold for amortisation of debt securities
changed to 30 days from 60 days, proposed to move to
full MTM by early next year.
l Proposed cap on sectoral limit of 25% has been brought
down to 20%. The additional exposure of 15% to HFCs
will be restructured as 10% to HFCs and 5% to
securitised debt.
l Prescribes minimum holding of 20% in cash, receivables
and government securities to improve liquidity of liquid
funds
l Prescribes mandatory investment in listed securities
2016
2017
l SEBI allowed mutual funds to
invest in REITs and InvITs
l Allowed investment up to Rs
50,000 per mutual fund per
financial year through digital
wallets
l Instant access facility to the
liquid funds investors (via
online mode) of up to Rs 50,000
or 90% of the folio value,
whichever is lower
l Government discontinued the
tax benefits of RGESS
12
Research
13
Systematic investment plans
14
7,000
8,100
9,200
10,300
11,400
12,500
0
10
20
30
40
50
60
70
80
90
Apr-
16
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16
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-16
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18
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19
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19
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Nift
y 50
Mon
thly
con
trib
utio
n (R
s bn
)
SIP monthly contribution Nifty 50 (RHS)
Little SIPs help rake in big bucks
Systematic investment plans (SIPs), a term typically associated small or retail investors, has emerged as a big wave in the Indian mutual fund industry.
Between April 2016 – when the Association of Mutual Funds in India (AMFI) started disclosing monthly SIP contributions – and June 2019, the route has helped rake in a whopping ~ Rs 2.3 trillion. That is nearly 19% of the increase of ~Rs 11.9 trillion in assets under management (AUM) of the industry.
The surge has come on scores of new retail investors joining the ranks, too, as reflected in the almost 3x growth in the number of SIP accounts to 27.3 million from 10 million over this period.
What’s more, SIPs in equity-oriented mutual funds surged despite frequent bouts of market turbulence between April 2016 and June 2019, indicating the route helps investors sidestep the behavioural weakness that emerges during volatile market phases.
SIP contributions surge despite market volatility
Source: AMFI, NSE
Research
15
7,500
8,500
9,500
10,500
11,500
12,500
0
5
10
15
20
25
30
Apr-
16
Jun-
16
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16
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-16
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-16
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-17
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18
Apr-
18
Jun-
18
Aug-
18
Oct
-18
Dec
-18
Feb-
19
Apr-
19
Jun-
19
Nift
y 50
No
of S
IP a
ccou
nts
(in m
n)
No of SIP accounts Nifty 50 (RHS)
Number of SIP accounts on a steady uptrend
Source: AMFI, NSE
Source: AMFI
Further, there is a progressive rise in the contribution by investors through SIPs, as seen in the month-on-month and year-on-year (fiscal) rise in investments through the systematic route. While investors pumped in a moderate ~ Rs 439 billion in fiscal 2017, the contribution has more than doubled in fiscal 2019 to ~Rs 927 billion. Further, during the three months to June 2019, nearly Rs 245 billion of money came in to the industry through SIPs.
Annual contribution on the rise, too
439
672927
FY17
FY18
FY19
(Rs bn)
16
0
5,000
10,000
15,000
20,000
25,000
30,000
Dec
-08
Jun-
09
Dec
-09
Jun-
10
Dec
-10
Jun-
11
Dec
-11
Jun-
12
Dec
-12
Jun-
13
Dec
-13
Jun-
14
Dec
-14
Jun-
15
Dec
-15
Jun-
16
Dec
-16
Jun-
17
Dec
-17
Jun-
18
Dec
-18
Jun-
19
Rs
bn
Month-end AUM
7%
8%
9%
10%
11%
12%
0
500
1,000
1,500
2,000
2,500
3,000
Aug-
16
Oct
-16
Dec
-16
Feb-
17
Apr-
17
Jun-
17
Aug-
17
Oct
-17
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-17
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18
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18
Jun-
18
Aug-
18
Oct
-18
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-18
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19
Apr-
19
Jun-
19
SIP
AU
M a
s %
of t
otal
indu
stry
ass
ets
SIP
AU
M (R
s bn
)
SIP AUM SIP AUM as % share of total industry assets (RHS)
Source: AMFI
Source: AMFI
Another interesting data point of note is the rising share of contribution from SIPs to the in-dustry’s AUM from around 8% in August 2016 to 11% in March 2019, and to 12% in June 2019.
SIP AUM as a percentage of the total industry assets on the rise
The surge in SIP activity and inflows into equity-oriented mutual funds, coupled with the fund flows into liquid/ money-market segments, helped the industry reach its record-high AUM of nearly Rs 26 trillion at the end of May 2019, before closing off its high at Rs 24.25 trillion in the first half of calendar 2019.
SIPs help overall industry assets surge
Research
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25%
17%
8%5%
0% 0% 0% 0% 0% 0%0%
5%
10%
15%
20%
25%
30%
1 year 2 years 3 years 4 years 5 years 6 years 7 years 8 years 9 years 10 years
Inst
ance
s of
neg
ativ
e re
turn
s
SIP tenure
However, the 6.1% rise in the mutual fund industry’s assets during the past year (up to June 2019) was the slowest in similar one-year periods since 2012, because of weak sentiment for debt mutual funds amid debt downgrades and subsequent liquidity crisis (the events that impacted debt mutual funds last year, along with the ensuing moderation by the regulator and the industry, would be taken up separately in this booklet).
Systematic investing can bear sweeter fruits over time
SIPs are long-term products and are very useful in wealth creation and risk reduction over a longer investing horizon. An analysis by CRISIL shows that the risk of getting negative returns reduces over longer investing horizons.
An analysis of CRISIL-AMFI Equity Fund Performance Index1 over the past 15 years to June 2019 showed that the instances of negative returns declined as the investment horizon in-creased. The difference between the minimum and maximum SIP returns also narrowed with the increase in the investment horizon.
Instances of negative returns decreased with increase in SIP tenure
Source: CRISIL Research
1 Please refer to annexure for detailed definition of CRISIL-AMFI Equity Fund Performance Index
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0
200
400
600
800
1,000
1,200
1,400
Tota
l Am
ount
Inve
sted
(Rs.
)
Larg
e Ca
p Fu
nds
Mul
ti C
ap F
unds
Mid
cap
Fund
s
Valu
e an
d C
ontr
aFu
nds
Sm
all C
ap F
unds
Larg
e an
d M
id C
apFu
nds
Focu
sed
Fund
s
Rs
'000
3-Year SIP 5-Year SIP 7-Year SIP 10-Year SIP
Investedamount
Further, investing through SIP for longer tenures can significantly increase the amount of wealth creation. An analysis of various equity categories shows that returns, and the sub-sequent wealth creation, for investors improve, in line with the increase in the investment horizon. Finance theory calls this the compounding effect, which says that longer periods of time allow your money to multiply.
Probability of wealth augmenting increases with the rise in SIP investment periods
Source: CRISIL Research
Monthly SIP contribution of Rs 5,000 has been assumedFund categories are represented by respective CRISIL-AMFI Fund Performance indicesPlease refer to annexure for detailed definition of CRISIL-AMFI Fund Performance Indices
Source: CRISIL Research
-80%
-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
120%
1 year 2 years 3 years 4 years 5 years 6 years 7 years 8 years 9 years 10 years
Ret
urns
SIP tenure
Maximum return
Minimum return
Reduced difference between min and max return
Research
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0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
Jun-
04D
ec-0
4Ju
n-05
Dec
-05
Jun-
06D
ec-0
6Ju
n-07
Dec
-07
Jun-
08D
ec-0
8Ju
n-09
Dec
-09
Jun-
10D
ec-1
0Ju
n-11
Dec
-11
Jun-
12D
ec-1
2Ju
n-13
Dec
-13
Jun-
14D
ec-1
4Ju
n-15
Dec
-15
Jun-
16D
ec-1
6Ju
n-17
Dec
-17
Jun-
18D
ec-1
8Ju
n-19
Valu
e of
inve
stm
ents
(Rs
'000
)
Regular SIP Top-up SIP
Rs 2.6 mn
Rs 3.3 mn
Top-up SIPs
Investors can benefit more by topping up their investments on a regular basis.
A comparison between a regular SIP and a top-up SIP – assuming a monthly investment of Rs 5,000 in CRISIL-AMFI Equity Fund Performance Index for 15 years to June 2019 shows that a top-up SIP (with a 5% increase in contribution every year) yields Rs 3.3 million, compared with Rs 2.6 million for a regular SIP. Top-up SIPs allow investors to increase their SIP contri-bution periodically, in sync with their rising incomes.
Top-up SIPs aid higher wealth creation, while being in sync with the rise in individual incomes
Source: CRISIL Research
Summing up
The growing size of SIPs and the number of SIP investors showcase the mutual fund industry’s efforts to inculcate the habit of disciplined investing.
The mutual fund industry has been working hard to spread financial literacy, financial freedom and the better aspects of behavioural investing among retail investors. The growing asset base from systematic investments is a win-win for both investors and the industry, as it improves the scale of players and provides wealth-creation opportunity for investors across risk profiles and investment horizons.
20
Note – Search queries denotes the most popular search queries for the trend. Scoring is on a relative scale where a value of 100 is the most commonly searched query, 50 is a query searched half as often as the most popular query, and so on.
Source: Google, AMFI
Google trend analytics
SIP run-up steady even as searches come off
Growth trajectory continues despite fewer searches
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p-1
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y-1
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IP m
on
thly
co
ntr
ibu
tio
n (
Rs
bn
)
Go
og
le t
ren
ds
SIP monthly contribution (RHS) #SIP searches
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tua
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Mutual Fund AUM (RHS) #Mutualfund searches
Research
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Debt funds
22
Regulator and industry come together to tide over crisis
Debt mutual funds went through a tumulus phase last year, hit by credit worries and the ensuing liquidity crisis, even as assets under management of the mutual fund industry kept swelling. In fact, the liquidity concerns, coupled with quarterly advance tax requirements of corporates, resulted in a record outflow of Rs 2.11 trillion from the liquid funds category in September 2018.
September 2018 saw the highest ever outflow from liquid funds
Source: AMFI
The situation prompted SEBI and the industry to swing into action. In order to avert such events in future, a working group comprising representatives of AMCs, the industry and academia was constituted. The recommendations of the group were taken as input by the Mutual Fund Advisory Committee.
-2,500
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19
Inflo
w /
out
flow
from
liqu
id f
unds
in R
s bn
Aset
gro
wth
of l
iqui
d fu
nds
in R
s bn
Inflow outflows Liquid fund asset growth (LHS)
Highest outflow on record from liquid funds - Sep
Research
23
Key measures announced post liquidity crisis
• To start with, the regulator targeted credit events and its impact on debt mutual fund investors, especially in the wake of haircuts taken by affected schemes. It allowed debt schemes to create ‘side pockets’, which would allow fund managers to segregate their stressed investments from the rest of the portfolio.
• To reduce the impact of the liquidity crisis in the mutual fund industry, the regulator reduced the threshold for amortisation to 30-day maturity from June 22, 2019. In addition to the reduction in threshold, it has modified the amortisation rule to 0.025% of the reference, compared with 0.10% earlier, to bring the reset price closer to the market price.
Further, SEBI has now proposed full mark to market (MTM). This means, in future, all debt securities would have to be valued at their market price.
The change to the reduced threshold and the future plans to full MTM is a best practice not followed even in developed markets such as the US, where the amortisation rule for money market fund restricts the weighted average maturity of the fund from exceeding 60 days since 2010, albeit down from 91 days earlier.
What are side pockets?
Segregated portfolios, or ‘side pockets’ as these are popularly called, allow a fund manager to isolate the affected portion of the portfolio impacted by credit default, to ring fence the assets. This ensures good investments are not impacted.
The side-pocketed portfolio could then be divided between investors based on their investment in the original scheme. Further, the fund manager could pursue negotiations with the affected issuer to recover the monies. Thus, side pockets free up money for regular fund management in the original scheme without choking money flow for investors and investment management.
To avoid misuse of the feature by fund houses, the regulator has said that trustees of all fund houses will have to put in place a framework to disincentivize indiscriminate use of this facility.
Further, SEBI has said that side pockets must not be looked upon as a sign of encouraging undue credit risks, as any misuse of the option would be considered serious, attracting stringent action.
24
• Further, the regulator has brought in symmetry in terms of the haircuts taken by AMCs in case of credit events. As per the new regulation, AMCs must value the below-invest-ment-grade securities at the price provided by valuation agencies. Until such time prices are not made available, they must be valued on the basis of indicative haircuts provided by the agencies. This follows a similar principle to that of the SEBI circular about creation of segregated portfolios in case of a credit event to ensure existing investors are insulated from new investors coming in after the event.
• Other changes effected by SEBI to de-risk debt mutual funds include:
1) Reducing sectoral limits to housing finance companies (HFCs) In the lead up to the eventual defaults since the start of fiscal 2019, there were specific
concerns related to liquidity in non-banking finance companies (NBFCs) and HFCs.
Mutual funds are major lenders to NBFCs as they subscribe to a significant portion of their commercial paper issuances. Conversely, the NBFC sector constitutes one of the top sectoral exposures in debt mutual funds.
Given the growing concentration risks that have come to the fore over the past year, the regulator has proposed changes in issuer and sectoral limits to HFCs in a bid to de-risk the portfolio. The cap on sectoral limit of 25% has been brought down to 20%. The additional exposure of 15% to HFCs will be restructured as 10% to HFCs and 5% to securitised debt, based on retail housing loan and affordable housing loan portfolios.
While the new regulations are aimed at reducing pitfalls from concentrated sectoral portfolios especially in vulnerable pockets, an analysis of the mutual fund industry shows that fund managers have noticeably moved away from the trend of sectoral allocation since the pre-crisis period.
Average sectoral exposures to vulnerable sectors have dipped
HFC % exposure (Liquid funds)
Jun-18 Jun-19 NBFC % exposure (Liquid funds)
Jun-18 Jun-19
Average 14.64 6.66 Average 20.28 15.22
Median 14.84 6.00 Median 20.13 15.07
Number of funds >10% 29 7 Number of funds >20% 17 10
Source: CRISIL Research
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2) Improving liquidity, reducing credit risk of liquid funds The regulator has proposed that liquid funds must hold at least 20% of their assets as
cash, government securities (G-secs), treasury bills, or repo on G-secs, which are all considered to be highly liquid instruments.
This is aimed at providing sufficient cushion to the funds in times of heavy redemption pressure. In case of a deficit, any additional investments must go towards meeting the above requirement before investing in other assets.
Further, liquid funds are not to invest in any structured obligations (SO), also now known as credit enhancements (CE). SOs are a source of higher returns for a fund, albeit at a high credit and liquidity risk. For other debt mutual funds, too, the exposure to SO/CE papers is to be capped at 10%, with 5% cap at a single group level. Moreover, for CE papers where equity shares have been pledged, SEBI has recommended a min-imum coverage of over four times.
Analysis of data shows that most liquid funds are already conforming to the mandate in cash and G-secs, and reducing their SO-rated exposure gradually.
Cash/G-secs exposures (Liquid funds)
SO-rated exposure (Liquid funds)
% exposure Jun-18 Jun-19
Max 3.15 2.34
Average 0.82 0.42
Number of funds >0% 12 8
% exposure Jun-18 Jun-19
Average 11.36 19.11
Median 7.92 12.29
Number of funds <20% 33 25
Source: CRISIL research
26
3) Prescribing exit load To reduce liquidity issues, a graded exit load is to be levied on investors of liquid
schemes who exit the scheme within a period of seven days. This brings in stability of cash flow for the category, aiding better investment positioning for the fund manager.
4) Mandatory investments in only listed debt securities This would bring in additional transparency as complete details of the security as well
as financials, profit and loss, and annual reports of issuer would be available in the public domain on a periodic basis, helping monitor risks more efficiently.
5) Fund houses to develop early warning signals SEBI has indicated to mutual fund houses that an early warning mechanism must be
put in place. This would bring in better monitoring by fund managers, enabling them to take appropriate actions and precautionary measures before credit risks materialise.
Summing up
The sweeping measures taken and proposed by the regulator are expected to put in place best practices in the industry. Investors must, however, note that debt mutual funds, like other mutual fund categories, are exposed to market risk. Hence, they must invest based on their risk-return profile and investment horizon.
The industry, on its part, must diligently follow the measures and aim to improve risk practices to avoid a contagion. Educating investors about various products and their risk-return profiles would also do a world of good for picking the right product match from the basket.
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Google trend analytics
Search for debt mutual funds spiked during credit events
Note – Search queries denotes the most popular search queries for the trend. Scoring is on a relative scale where a value of 100 is the most commonly searched query, 50 is a query searched half as often as the most popular query, and so on.
Source: Google, AMFI
10,000
10,500
11,000
11,500
12,000
12,500
13,000
13,500
De
bt
mu
tua
l fu
nd
s A
UM
(R
s b
n)
40
45
50
55
60
65
70
75
Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19 Jul-19
Debt mutual fund AUM (RHS)#Debtmutual fund searches
Spike in google searches seen during credit events
Go
og
le t
ren
ds
28
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Fintech
30
Fintech transforming asset management Financial technology, or fintech, has played a key role in rapid development of global financial markets in recent years, having evolved to plug gaps such as speed, cost, transparency, ac-cess and security in delivery of financial services.
In the asset management space, fintech has the opportunity to address the needs of custom-ers, both internal (investment management) and external (clients).
Technology an ally for both internal and external customers of AMCs
Front deskAcquisition
Order management
ServiceBack officePortfolio
management
Risk management
Trade execution
Compliance
Source: Inputs taken from BlackRock viewpoint – The role of technology within asset management
Role of technology in managing investments
Technology enables an asset manager to considerably improve the investment process while reducing the associated risks.
For instance, automating the investment process will boost a fund manager’s efficacy in terms of time and portfolio management, aiding the overall investing strategy of the fund house. End-to-end management of investments can be completely automated, with decisions driven by aggregated data, algorithms and risk models, reducing subjectivity in investment decisions.
Technology can also play an important role in risk and compliance management with the use of automated checks and balances, and risk models. This is especially important today, given the rapid changes in risk controls enforced by the regulator to factor in changes in the market.
Thus, a cohesive technological platform that can improve the investment process, introduce
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effective risk controls, and maintain an audit trail of transactions can be a boon to the asset management process.
With improved risk management and the aggregation of objective performance data, fund managers can make smarter decisions.
New techniques and developments in this field include the usage of artificial intelligence (AI), machine learning (ML) and robotic process automation (RPA). Meanwhile, the use of distributed ledger technology and blockchain is being explored to simultaneously provide access to data to all parties involved, improving overall efficiency.
For investors, this digital transformation of the back office of asset management companies can bring benefits such as transparency, better risk management and deeper disclosure of data, a win-win for both the industry and the investor.
Role of technology in managing clients
Driven by fintech solutions, client management offers great potential for development.
In India, most investors still invest in traditional instruments via the brick-and-mortar route. Investor penetration in mutual funds remains low. Fintech in the client management space can boost penetration, convert a large proportion of the current investment base into recurring investments, and improve the overall customer experience of investing in the mutual funds industry.
Some of the tools used by the industry to digitally enhance the customer investment process are usage of online platforms, in-house captive mobile applications, robo-advisory platforms and possibly e-commerce platforms in future. These applications and platforms enable paperless and intuitive investor transactions, for greater industry ease of access.
Further, the use of asset allocation and algorithms to move from subjective investment decisions to objective goal-based investments is also a positive move towards financial planning, compared with the traditional goalless savings approach.
In addition, mining of customer data has been garnering a lot of traction within the asset management and financial planning space.
Data is king, and big data analytics allows mutual funds to statistically analyse the actions of investors through tools such as predictive analytics on customer data analysis, in order to better understand customer behaviour and improve sales.
Data analytics can be used as a resource for customer management and to aid the sales process by offering specific intelligence to field agents, including the distributor community. This data provides an insight into customer preferences, enabling the players to offer bespoke products, tailored to suit specific customer preferences, without the need to manually sift through customer interactions.
32
0%
2%
4%
6%
8%
10%
12%
14%
16%
0
5,000
10,000
15,000
20,000
Apr-
16
Jun-
16
Aug-
16
Oct
-16
Dec
-16
Feb-
17
Apr-
17
Jun-
17
Aug-
17
Oct
-17
Dec
-17
Feb-
18
Apr-
18
Jun-
18
Aug-
18
Oct
-18
Dec
-18
Feb-
19
Apr-
19
Jun-
19
Gro
ss in
flow
s (R
s bn
)
Gross flows through digital mode Gross flows through Physical mode% share of overall flows (RHS)
Technology-adoption paying dividends
Adoption of technology in the digital payments sphere has aided the rapid influx of digital money into the industry. The share of digital gross inflows grew from ~0.5% three years ago to nearly 1/7th of gross flows by end-fiscal 2019, given the growing smartphone and internet penetration in the hinterland. Inflows through the physical route have been gradually declining.
Digital payments continue to surge
Source: AMFI
In terms of geographic penetration, the industry moved from categorisation of regions from Top 15 (T15) and beyond 15 (B15) to T30 and B30 cities, in line with the increasing penetration of the industry within the country.
Thus, the long-term trend analysis of the penetration is not comparable. However, as seen in previous years, there is an increasing trend in assimilation of the mutual fund industry in the hinterland even as higher adoption remains prevalent in T30 cities.
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0
20
40
60
80
100
120
0
500
1,000
1,500
2,000
2,500
3,000
Apr-
18
May
-18
Jun-
18
Jul-
18
Aug-
18
Sep
-18
Oct
-18
Nov
-18
Dec
-18
Jan-
19
Feb-
19
Mar
-19
Apr-
19
May
-19
Jun-
19
Gro
ss fl
ows
(Rs
bn)
Gro
ss fl
ows
(Rs
bn)
Gross digital flows from T30 cities Gross digital flows from B30 cities
0
10
20
30
40
50
60
70
0
200
400
600
800
1,000
1,200
1,400
Apr-
16
May
-16
Jun-
16
Jul-
16
Aug-
16
Sep
-16
Oct
-16
Nov
-16
Dec
-16
Jan-
17
Feb-
17
Mar
-17
Apr-
17
May
-17
Jun-
17
Jul-
17
Aug-
17
Sep
-17
Oct
-17
Nov
-17
Dec
-17
Jan-
18
Feb-
18
Mar
-18
Gro
ss fl
ows
(Rs
bn)
Gro
ss fl
ows
(Rs
bn)
Gross digital flows from T15 cities Gross digital flows from B15 cities (RHS)
Rise in geographic penetration even as top cities contribute the most flows
Source: AMFI
Within the investor segment, individual investors lead in terms of AUM contribution (as de-tailed in the annexure chapters), while institutional investors continue to lead in terms of digital money flowing into the industry.
34
0
20
40
60
80
100
120
0
500
1,000
1,500
2,000
2,500
3,000Ap
r-16
Jun-
16
Aug-
16
Oct
-16
Dec
-16
Feb-
17
Apr-
17
Jun-
17
Aug-
17
Oct
-17
Dec
-17
Feb-
18
Apr-
18
Jun-
18
Aug-
18
Oct
-18
Dec
-18
Feb-
19
Apr-
19
Jun-
19
Gro
ss fl
ows
(Rs
bn)
Gro
ss fl
ows
(Rs
bn)
Gross digital flows from Institutional investorsGross digital flows from Individual investors (RHS)
Institutional investors continue to garner a lion’s share of digital transactions
Source: AMFI
Among the factors driving these changes in geography and investor segment are the growing availability of information, and awareness and penetration of the industry across geographies/investor segments. Given the pace of development in the digital space, the laggards are expected to catch up in years to come.
The government has also played a significant role in digitisation through its extensive efforts at financial inclusion, spreading financial awareness to the remotest parts of the country and bridging the geographical divide. The recent proposal by the government and the Reserve Bank of India (RBI) to use Aadhaar for KYC will ease digital transactions.
Further, the government and the regulators have also taken several initiatives to boost the fintech ecosystem and provide startups with new opportunities to launch competitive products.
Clearly, the role of technology can only grow, and the digital mode is the way forward for the industry, intermediaries and investors. Adoption will be a win-win for all – helping boost industry penetration while providing it with an effective medium to improve efficiency and reduce costs, the benefits of which can be passed on to investors.
But risks need to be managed
Notwithstanding the benefits of technology, there are overlapping risks that need to be managed by the mutual fund industry, especially in a developing country such as India. Some major factors that need to be considered in this respect are detailed below.
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What are the risks?
Source: IMF policy paper – Fintech: The experience so far, June 2019
There are risks associated with both front and back office operations.
At the front end, it is important to ensure customer data integrity for both prospective and current clients. This is especially important for first-time customers who are yet to get com-fortable with digital platforms.
At the back end, a systemic process that does not take into account changing market dynam-ics and displays a bias for a particular investment design or prevalent workflow could reduce the benefits of technology adoption.
Thus, it is important that the mutual funds industry adopt fintech while taking cognisance of the risks involved, and upgrade technologies as and when advancements are available.
Consumer protection
Data protection
Discrimination
Exclusion
Transparency and electronic disclosure; product suitability and over-indebtedness; agent liability; data privacy; effective recourse mechanisms; safety of funds; cybersecurity, and digital illiteracy.
Compromise of privacy, identity theft and harm where consumers have low levels of financial and digital capability
Biases inhibited with biases from underlying data, the people designing them and existing preferences prevalent in the industry
Unequal access, lack of infrastructure that permits enhanced analytics, lack of access to financial illiterate
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Performance
38
0
10,000
20,000
30,000
40,000
Jun-
99
Jun-
00
Jun-
01
Jun-
02
Jun-
03
Jun-
04
Jun-
05
Jun-
06
Jun-
07
Jun-
08
Jun-
09
Jun-
10
Jun-
11
Jun-
12
Jun-
13
Jun-
14
Jun-
15
Jun-
16
Jun-
17
Jun-
18
Jun-
19
CRISIL – AMFI Equity Fund Performance Index Nifty 50 Nifty 500 S&P BSE SENSEX
Performance of mutual funds across categories
As an investment vehicle, mutual funds have the potential to give good returns and create wealth for investors in the long term. This makes them an important piece of the wealth man-agement jigsaw.
A look at the CRISIL-AMFI Equity Fund Performance Index shows equity funds have on aggre-gate underperformed the broad equity markets in the past one year.
However, this is not a fair comparison. To reiterate, mutual funds are a long-term investment avenue, and hence, their performance is best analysed over the long term.
A back-of-the-envelope calculation shows that Rs 1,000 invested in this index would have grown more than 30 times to Rs 30,735 in 20 years through June 30, 2019, while a similar investment in S&P BSE Sensex or Nifty 50 would have grown to slightly more than 13 times.
Growth of Rs 1,000 in equity mutual funds versus benchmarks
Category/Index CRISIL-AMFI Equity Fund Performance Index
S&P BSE Sensex
Nifty 50 Nifty 500
Growth of Rs 1,000 since June 30, 1999 30,735 13,129 13,080 16,348
Source: CRISIL Research, BSE, NSE
CRISIL-AMFI Fund Performance indices are weighted average indices of funds ranked under respective categories in CRISIL Mutual Fund RankingPlease refer to annexure for detailed definition of CRISIL-AMFI Fund Performance IndicesData as on June 28, 2019Total returns index has been considered for S&P BSE Sensex, Nifty 50 and Nifty 500Data since inception of Nifty 50 Total Returns Index, i.e., June 30, 1999
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Category Average rolling returns
3 years 5 years 7 years 10 years
CRISIL–AMFI Large Cap Fund Performance Index
13.85% 13.32% 12.41% 13.26%
S&P BSE Sensex 13.40% 12.64% 11.81% 12.56%
Nifty 50 13.27% 12.50% 11.66% 12.43%
CRISIL–AMFI Large and Midcap Fund Performance Index
15.17% 15.13% 14.03% 15.06%
Nifty 500 13.40% 12.69% 11.63% 12.60%
CRISIL–AMFI Multi Cap Fund Performance Index
14.86% 14.23% 13.06% 14.14%
Nifty 500 13.40% 12.69% 11.63% 12.60%
CRISIL–AMFI Midcap Fund Performance Index
15.74% 16.29% 15.18% 16.03%
Nifty Midcap 100 15.28% 15.02% 13.43% 14.88%
CRISIL–AMFI Smallcap Fund Performance Index
23.63% 25.88% 21.25% NA
Nifty Smallcap 100 13.16% 14.48% 11.97% NAS&P BSE Smallcap 13.49% 15.18% 11.77% NA
CRISIL–AMFI ELSS Fund Performance Index
14.80% 14.44% 13.39% 14.35%
Nifty 500 13.40% 12.69% 11.63% 12.60%
CRISIL–AMFI Focused Fund Performance Index
14.20% 13.67% 12.69% 13.58%
Nifty 500 12.73% 12.37% 11.37% 12.28%
CRISIL–AMFI Value and Contra Fund Performance Index
14.30% 13.81% 12.62% 13.67%
Nifty 500 13.40% 12.69% 11.63% 12.60%
A comparison of the rolling returns of CRISIL-AMFI fund performance indices with their re-spective benchmarks across categories and intervals, over 15 years or since inception of the indices, whichever is longer, shows the fund indices have outperformed their benchmarks in all the periods analysed.
Source: CRISIL Research, BSE, NSE
CRISIL-AMFI Fund Performance indices are weighted average indices of funds ranked under respective categories in CRISIL Mutual Fund RankingPlease refer to annexure for detailed definition of CRISIL-AMFI Fund Performance IndicesTotal returns index has been considered for S&P BSE Sensex, Nifty 50, Nifty 500, Nifty Midcap 100, S&P BSE Smallcap, Nifty Smallcap 100Data as on June 28, 2019Annualised return
40
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
Mar
-02
Apr-
03
Apr-
04
Apr-
05
Apr-
06
Apr-
07
Apr-
08
Apr-
09
May
-10
May
-11
May
-12
May
-13
May
-14
May
-15
Jun-
16
Jun-
17
Jun-
18
Jun-
19
CRISIL – AMFI Aggressive Hybrid Fund Performance Index
CRISIL – AMFI Conservative Hybrid Fund Performance IndexCRISIL Hybrid 35+65 - Aggressive Index
CRISIL Hybrid 85+15 - Conservative Index
Hybrid
Hybrid funds are mutual funds that invest in both equity and debt securities. Some hybrid funds also invest in other asset classes such as gold, which helps in portfolio diversification.
Growth of Rs 1,000 in hybrid mutual funds versus benchmarks
Category/Index CRISIL–AMFI Aggressive
Hybrid Fund Performance
Index
CRISIL Hybrid 35+65 -
Aggressive Index
CRISIL–AMFI Conservative Hybrid Fund Performance
Index
CRISIL Hybrid 85+15 -
Conservative Index
Growth of Rs 1,000 since March 31, 2002 14,541 9,597 4,622 4,327
Source: CRISIL Research, BSE, NSE
CRISIL-AMFI Fund Performance indices are weighted average indices of funds ranked under respective categories in CRISIL Mutual Fund RankingPlease refer to annexure for detailed definition of CRISIL-AMFI Fund Performance IndicesData as on June 28, 2019Total returns index has been considered for S&P BSE Sensex, Nifty 50 and Nifty 500Data since inception of Nifty 50 Total Returns Index, i.e., June 30, 1999
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Debt
Debt funds are an attractive choice over bank fixed deposits as they provide the benefit of indexation for a holding period of more than three years. An analysis of investment in three indices – CRISIL-AMFI Medium Duration Fund Performance Index, CRISIL-AMFI Medium to Long Duration Fund Performance Index and CRISIL–AMFI Gilt Fund Performance Index – compared with that in a three-year bank fixed deposit over 15 years through June 2019 shows the fund indices have given superior returns on a post-tax basis.
Category 15-year returns pre-tax 15-year returns post-tax
CRISIL-AMFI Medium Duration Fund Performance Index 7.29% 7.08%CRISIL-AMFI Medium to Long Duration Fund Performance Index 7.39% 7.14%CRISIL–AMFI Gilt Fund Performance Index 7.09% 6.83%3-year FD 7.20% 5.14%
Source: CRISIL Research
CRISIL-AMFI Fund Performance indices are weighted average indices of funds ranked under respective categories in CRISIL Mutual Fund RankingPlease refer to annexure for detailed definition of CRISIL-AMFI Fund Performance IndicesGrowth in Cost Inflation Index for FY20 has been assumed to be the same as in the previous yearReturns from 3-year fixed deposit have been calculated by considering the simple average of FD rates of top three (by total deposits) public and private sector banks on a continuous basis for buckets of three years for the last 15 yearsHighest tax bracket of 30% is assumed
An investment of Rs 1,000 in CRISIL Debt Fund Performance Index on March 31, 2002, would have grown to Rs 3,530, whereas the same amount invested in CRISIL Composite Bond Fund Index for the same period would have grown to Rs 3,351.
42
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
Apr-
02
Jan-
03
Oct
-03
Aug-
04
May
-05
Mar
-06
Dec
-06
Sep
-07
Jul-
08
Apr-
09
Jan-
10
Nov
-10
Aug-
11
Jun-
12
Mar
-13
Dec
-13
Oct
-14
Jul-
15
May
-16
Feb-
17
Nov
-17
Sep
-18
Jun-
19
CRISIL – AMFI Short Duration Fund Performance Index CRISIL Short Term Bond Fund Index
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
Mar
-02
Apr-
03
Apr-
04
Apr-
05
Apr-
06
Apr-
07
Apr-
08
May
-09
May
-10
May
-11
May
-12
May
-13
May
-14
Jun-
15
Jun-
16
Jun-
17
Jun-
18
Jun-
19
CRISIL AMFI Debt Fund Performance Index CRISIL Composite Bond Fund Index
Source: CRISIL Research
CRISIL-AMFI Fund Performance indices are weighted average indices of funds ranked under respective categories in CRISIL Mutual Fund RankingPlease refer to annexure for detailed definition of CRISIL-AMFI Fund Performance IndicesData as on June 28, 2019Data since inception of CRISIL Composite Bond Fund Index, i.e., March 31, 2002
Category CRISIL AMFI Debt Fund Performance Index
CRISIL Composite Bond Fund Index
Growth of Rs 1000 since March 31, 2002 3,530 3,351
Growth of Rs 1,000 in short term debt mutual funds versus benchmarks
Growth of Rs 1,000 in debt mutual funds versus benchmarks
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Source: CRISIL Research
CRISIL-AMFI Fund Performance indices are weighted average indices of funds ranked under respective categories in CRISIL Mutual Fund RankingPlease refer to annexure for detailed definition of CRISIL-AMFI Fund Performance indicesData as on June 28, 2019
Category/Index CRISIL-AMFI Short Duration Fund
Performance Index
CRISIL Short Term Bond Fund Index
Growth of Rs 1,000 since April 01, 2002 3,503 3,350
A Medium to Long duration funds B Gilt funds C Short duration funds D Bank FD
Market phase analysis – CRISIL-AMFI debt fund performance indices
Source: CRISIL Research
Medium to long duration, gilt and short duration funds represented by CRISIL-AMFI Medium to Long Duration Fund Performance Index, CRISIL-AMFI Gilt Fund Performance Index and CRISIL-AMFI Short Duration Fund Performance Index, respectivelyCRISIL-AMFI Short Duration Fund Performance Index is available from April 2002 (inception)Banks’ effective FD rates represented by three- and one-year FD rates; for period less than a year, one-year FD rate has been consideredReturns for market phase of more than one year are annualisedCumulative returns means returns since September 01, 2001^ Absolute returnsCRISIL-AMFI Fund Performance indices are weighted average indices of funds ranked under respective categories in CRISIL Mutual Fund RankingPlease refer to annexure for detailed definition of CRISIL-AMFI Fund Performance indicesData as on June 28, 2019
4.00%
5.00%
6.00%
7.00%
8.00%
9.00%
10.00%
11.00%
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2018
2019
10 y
ear g
-sec
yie
ld m
ovem
ent
10 Year G-sec yield
Secular decline in yields in 2000-04
Flat or high interest rate period of
2004-08
Flat or high interest rate period of2008-14
Declining yields2014-2016
Sharp correction in yields in 2008^
Phase C umulative
11.34% 11.34%
16.40% 16.40%
- -
7.32% 7.32%
Phase C umulative
4.16% 6.87%
3.25% 8.13%
6.42% 6.65%
6.01% 6.51%
Phase C umulative
19.51% 9.08%
25.71% 11.06%
5.13% 7.01%
3.30% 6.60%
Phase C umulative
5.71% 7.59%
3.48% 7.67%
7.90% 7.42%
9.75% 7.97%
Phase C umulative
13.78% 8.45%
15.50% 8.75%
10.21% 7.83%
8.47% 8.04%
Phase C umulative
3.94% 7.78%
4.88% 8.18%
5.88% 7.54%
7.01% 7.89%
Recent increase in yields
2016-present
Recent increasein yields
2016-present
44
Funds with very short maturity
Funds with maturity of less than one year, too, have outperformed traditional savings bank accounts, showing these can be a viable alternative for smaller investment horizons.
Category/Index 3 months 6 months 1 year 3 years 5 years
CRISIL–AMFI Liquid Fund Performance Index 1.76% 3.55% 7.43% 7.05% 7.59%CRISIL–AMFI Ultra Short Duration Fund Performance Index
1.55% 3.78% 7.82% 7.47% 7.92%
CRISIL–AMFI Low Duration Fund Performance Index 0.63% 2.85% 6.94% 7.14% 7.73%CRISIL–AMFI Money Market Fund Performance Index 1.83% 3.96% 7.81% 7.29% 7.76%Savings Bank Rate Index 0.87% 1.70% 3.49% 3.69% 3.81%
Source: CRISIL Research
CRISIL-AMFI Fund Performance indices are weighted average indices of funds ranked under respective categories in CRISIL Mutual Fund RankingSavings Bank Rate Index has been constructed using the average savings rate of top three (by total deposits) public and private sector banksPlease refer to annexure for detailed definition of CRISIL-AMFI Fund Performance indices and Savings Bank Rate IndexData as on June 28, 2019Returns for period more than one year are annualised
Research
45
Other industry trends
46
38%35%
26%
32% 33%31%
25% 24%
33% 33% 34%
39%
43%45%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
0
5,000
10,000
15,000
20,000
25,000
30,000
Mar
-07
Mar
-08
Mar
-09
Mar
-10
Mar
-11
Mar
-12
Mar
-13
Mar
-14
Mar
-15
Mar
-16
Mar
-17
Mar
-18
Mar
-19
Jun-
19
Sha
re o
f equ
ity
orie
nted
fund
s
AUM
(Rs
bn)
Equity Aggressive hybrid (Balanced) DebtLiquid / Money market Others Share of equity oriented funds
Other industry trends
Surge in equity fund assets takes their share to 45% of AUM as of June 2019
The mutual fund industry’s stellar growth has come on the back of a surge in equity-oriented funds, which saw their assets under management (AUM) log a whopping 38.6% compound annual growth rate (CAGR) between March 2014 and June 2019.
The surge took the equity-oriented mutual funds’ share of industry assets to 45% as of June 2019, up sharply from 24% as of March 2014.
It also benefitted hybrid funds – especially aggressive hybrid funds (erstwhile balanced funds), which invest more than 65% in equities – whose AUM grew at ~51% CAGR during the period analysed. This compares with ~23% growth for the industry and 8% and 27%, respectively, for debt and liquid money market segments.
Equity AUM on steady uptrend
Source: AMFI
Based on month-end AUMCategories as per June 2019 monthly AUM report have been mapped with old categories in order to maintain comparability with historical AUMEquity includes other ETFs, arbitrage, balanced advantage, equity savings categoriesDebt includes conservative hybrid fundsOthers include solution oriented funds (wherever split available), gold ETFs, fund of funds - investing overseas
Research
47
831
(494)
(220)
765 541
1,033 1,342
3,430
2,718
1,097
176
-2,000
-1,000
0
1,000
2,000
3,000
4,000
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 Q1FY20
Net
flow
s (in
Rs
bn)
Equity Debt Aggressive hybrid (Balanced) Liquid / Money market Others Total
Equity-oriented funds have seen net inflow of ~Rs 6.3 trillion since fiscal 2015
The surge in assets owes itself to robust inflows, given higher participation by individual in-vestors, especially through the SIP route, and also a rising equity market (Nifty 50 TRI re-turned 12.8% CAGR between March 2014 and June 2019).
Beginning fiscal 2015, the Indian mutual fund industry witnessed sturdy inflows of Rs 9.8 trillion till the first quarter of fiscal 2020. Equity-oriented funds accounted for 64% of the net inflows, while balanced funds garnered 16%.
In the fixed-income space, debt funds witnessed net inflows from fiscal 2015 to 2017. How-ever, there was a course reversal after that, with net outflows through Q1 fiscal 2020. Indeed, the net outflow from debt funds between fiscal 2015 and Q1 fiscal 2020 was around 28 billion.
Liquid/ money market funds, on the other hand, saw stable net inflows of Rs 2.1 trillion during the period.
Equity funds lead net flows for industry
Source: AMFI
Categories as Q1 FY 20 have been mapped with old categories in order to maintain comparability with historical AUMEquity includes other ETFs, arbitrage, balanced advantage, equity savings categoriesDebt includes conservative hybrid fundsOthers include solution oriented funds (wherever split available), gold ETFs, fund of funds - investing overseas
48
Industry added over 44 million folios since March 2014, mostly individual in-vestors
The mutual fund industry has seen growing participation from households in recent years, given growing awareness, financial inclusion, and improved access to banking channels.
The industry added 44.2 million folios between March 2014 and June 2019.
Almost the entire growth in folios came from the individual investors segment (retail & HNI), which logged a CAGR of 15.5% over this period. Their average ticket size, too, increased from ~Rs 102,000 in March 2014 to ~Rs 169,000 in June 2019.
Institutional investor folios, on the other hand, saw no significant addition. However, their average ticket size more than doubled from Rs 11.5 million in March 2014 to Rs 23.1 million in June 2019.
Growing base of individual investors, with increasing ticket size
Source: AMFI
48 47 46 42 39 41 47 55 71 82 83
58 65 69
84 102
135
133
159 165
168 169
-
20
40
60
80
100
120
140
160
180
-
10
20
30
40
50
60
70
80
90
Ma
r-1
0
Ma
r-1
1
Ma
r-1
2
Ma
r-1
3
Ma
r-1
4
Ma
r-1
5
Ma
r-1
6
Ma
r-1
7
Ma
r-1
8
Ma
r-1
9
Ju
ne
-19
Ave
rag
e t
ick
et
siz
e (
in R
s '0
00
)
No
. o
f fo
lio
s (
in m
n)
No. of folios Average ticket size (RHS)
Research
49
Institutional investors see average ticket size double, amid stable folio count
Source: AMFI
Increase in individual participation takes their share to 58% of AUM
Recent years have seen the mutual fund assets attributable to individual investors surpass those of the institutional segment. AUM of individual investors grew from Rs 4 trillion in March 2014 to Rs 14 trillion in June 2019, logging a 27% CAGR. Consequently, its share in-creased from 48% to 58%. AUM of institutional investors, on the other hand logged a slower 18.1% CAGR from Rs 4.3 trillion to Rs 10.2 trillion.
0.3
8
0.4
0
0.4
3
0.4
9
0.3
7
0.3
7
0.4
6
0.5
7
0.4
1
0.4
4
0.4
4
8,827
7,254 6,283
7,107
11,472
14,318
13,037
15,376
23,446
22,857
23,085
5,000
10,000
15,000
20,000
25,000
0.10
0.20
0.30
0.40
0.50
0.60
0.70 M
ar-
10
Ma
r-1
1
Ma
r-1
2
Ma
r-1
3
Ma
r-1
4
Ma
r-1
5
Ma
r-1
6
Ma
r-1
7
Ma
r-1
8
Ma
r-1
9
Ju
ne
-19
Ave
rag
e t
ick
et
siz
e (
in R
s '0
00
)
No
. o
f fo
lio
s (
in m
n)
No. of folios Average ticket size (RHS)
0 0
50
Individual investors invest mainly in equity funds, prefer hand-holding by distributors
As of June 2019, 57.4% of individual investors’ AUM was into equity-oriented funds, whereas institutional investors mainly preferred the fixed-income segment (debt and liquid/ money market), which constituted 77.2% of their assets.
Source: AMFIBased on month-end AUM
Individual investors now account for nearly 3/5th of industry assets
2,7
80
3,0
40
3,1
71
3,5
56
4,0
02
5,5
77
6,2
86
8,7
28
13
,81
5
3,3
66
2,9
29
2,7
06
3,4
69
4,2
51
5,2
50
6,0
43
8,8
19
9,9
81
45%
51%54%
51%48%
52%51% 50%
55%
58% 58%
70%
60%
50%
40%
30%
20%
10%
0%
30,000
25,000
20,000
15,000
10,000
5,000
-
Ma
r-1
0
Ma
r-1
1
Ma
r-1
2
Ma
r-1
3
Ma
r-1
4
Ma
r-1
5
Ma
r-1
6
Ma
r-1
7
Ma
r-1
8
Ma
r-1
9
Ju
ne
-19
11
,72
2
9,6
38
14
,04
6
10
,20
4
AU
M (
in R
s b
illi
on
)
Sh
are
of
AU
M (
%)
Individual investors Share of individual investors' AUM (RHS)Institutional investors
AUM
(in
Rs
bn)
Research
51
Individual investorsAggressivehybrid(Balanced)11.7%
Debt24.3%
Liquid /Moneymarket6.4%
Equity
57.4%Others0.3%
Institutional investors
Liquid / Moneymarket44.1%
Others0.3%
Aggressivehybrid(Balanced)1.1%
33.1%Debt
Equity 21.4%
Source: AMFIBased on monthly average AUMEquity includes other ETFsOthers include gold ETFs and fund of funds – investing overseas
Source: AMFIBased on monthly average AUM
Institutional investors had over two-thirds of their mutual fund assets invested through direct plans, largely owing to greater savviness and faster adoption. Individual investors, on the other hand, invested largely through regular plans (~83% of their AUM), indicating a preference for hand-holding by distributors.
AUM split of regular and direct plans (June 2019)
Category-wise AUM split of individual investors and institutional investors (June 2019)
Direct
17.3%
Regular
82.7%
Individual investors
Direct 69.3%
Regular 30.7%
Institutional Investors
52
Uttarakhand
Andaman and Nicobar IslandsLakshadweep
Odisha
Puducherry
Source: AMFIBased on monthly average AUMEquity includes other ETFsOthers include gold ETFs and fund of funds – investing overseas
39%
5%
25%
31%
0.4%
16%1%
48%
32%
2.0%
Mar 2014
Jun 2019
Mar 2014
Jun 2019
0.2%
31%
26%
38%
5%
14%
1%
57%
28%
0.7%
Mar 2014
Jun 2019
0.2%
40%
5%
33%
21%
23%
1%
53%
22%
0.9%
42%
9%
31%
17%
0.1%
30%
2%
56%
11%0.7%
Mar 2014
Jun 2019
EquityAggressive
hybrid (Balanced)
Debt Liquid / Money market
Others
Mar 2014
Jun 2019
24%
1%
56%
17%
0.9%
41%
12%
33%
15%
0.2%
Research
53
In terms of asset allocation of the top five states, the share of equity-oriented funds has increased significantly over the past five years. As of March 2014, Gu-jarat had the highest allocation (30%) to equities. However, the other four states have caught up since then, aligning to a more balanced asset mix.
Source: AMFI Based on monthly average AUM
State Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 Jun-19
Maharashtra 47% 44% 44% 43% 41% 41% 42%New Delhi 8% 10% 10% 10% 10% 9% 9%
Karnataka 7% 7% 7% 7% 7% 7% 7%Gujarat 5% 6% 6% 6% 7% 7% 7%West Bengal 5% 5% 5% 5% 5% 5% 5%Total 72% 71% 72% 71% 70% 70% 70%
AUM share of top 5 states
The top 5 states continued to dominate the mutual fund industry, with around 70% share of AUM, and logging a healthy 21.5% CAGR between March 2014 and June 2019. As of June 2019, Maharashtra held lion’s share (42%) of the assets, followed by other states with single-digit shares.
While the AUM of the top 5 states grew at a healthy pace of 21.5% CAGR between March 2014 and June 2019, the AUM of the remaining states (including union territories), however, grew at a faster rate of 24.4%.
Talking of cities, majority of the mutual fund assets were held in the top 15 (T15) cities. However, boosted by the regulator’s move to allow asset management com-panies to charge an additional 30 bps expense ratio to incentivise penetration in smaller towns (beyond top 15, or B15 cities), this segment saw rapid growth and its AUM share went up from 16% in March 2014 to 19% in March 2018.
Then, in February 2018, fund houses were allowed to charge the additional 30 bps in beyond top 30 (B30) cities instead of B15. As of June 2019, this segment accounted for 15.5% of the industry’s assets, translating to Rs 4 trillion in value.
Source: AMFIBased on monthly average AUM
T15 and B15 AUM – March 2014 to March 2018
Source: AMFIBased on monthly average AUM
T30 and B30 AUM – June 2019
T30
84.5%
B30
15.5%
B30 & T30 Split of AUM - June 2019
15.5
1.4
1.9
2.2
3.1
4.3
Mar-14 Mar-15 Mar-16 Mar-17 Mar-18
16% 16%16% 17%
19%
10.2 7.6 11.4 18.4
T15 B15 Share of B15 AUM (RHS)
Top 5states
remain in lead, but smaller towns
growing faster
54
0.5% 1.3%
2.1% 2.0%1.7%
1.5%2.0%
3.0%
3.8%
6.1% 5.8%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
0
5,000
10,000
15,000
20,000
25,000
30,000
Mar
-10
Mar
-11
Mar
-12
Mar
-13
Mar
-14
Mar
-15
Mar
-16
Mar
-17
Mar
-18
Mar
-19
Jun-
19
Sha
re o
f pas
sive
fund
s
AUM
in R
s bn
Active funds Passive funds Share of passive funds (RHS)
0.0%
20.0%
40.0%
60.0%
80.0%
100.0%
Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 Jun-19
% o
f pas
sive
fun
d as
sets
Equity ETFs Debt ETFs Liquid ETFs Gold ETFs Index funds
Passive funds continue to garner traction
While active funds continue to dominate the Indian mutual fund industry, the passive seg-ment has been gaining steam gradually, thanks to investments by the Employees’ Provident Funds into ETFs. The share of passive funds rose to 5.8% of the total assets as of June 2019, dipping slightly from 6.1% at close of fiscal 2019. The value of passive funds’ assets stood at Rs 1.4 trillion as of June 2019.
Passive funds on a steady uptrend
Source: AMFI, CRISIL ResearchPassive funds include ETFs and index fundsBased on month-end AUM
Source: AMFI, CRISIL ResearchBased on month-end AUM
Equity ETFs dominate passive funds’ assets
Research
55
Annexure
56
Sr No
Index Inception date
Definition
1 CRISIL-AMFI Equity Fund Performance Index
1-Apr-97 CRISIL-AMFI Equity Fund Performance Index seeks to track the performance of the equity funds. The index consists of mutual fund schemes from large cap equity, large and midcap equity, multicap, midcap, small cap equity, focused equity and value & contra categories
2 CRISIL-AMFI Large Cap Fund Performance Index
1-Apr-00 CRISIL-AMFI Large Cap Fund Performance Index seeks to track the performance of large cap equity schemes
3 CRISIL-AMFI Large and Midcap Fund Performance Index
31-Mar-04 CRISIL-AMFI Large and Midcap Fund Performance Index seeks to track the performance of large and midcap cap equity schemes
4 CRISIL-AMFI Multi Cap Fund Performance Index
1-Apr-00 CRISIL-AMFI Multi Cap Fund Performance Index seeks to track the performance of multi cap equity schemes
5 CRISIL-AMFI Midcap Fund Performance Index
1-Oct-04 CRISIL-AMFI Midcap Fund Performance Index seeks to track the performance of midcap equity schemes
6 CRISIL-AMFI Smallcap Fund Performance Index
1-Apr-10 CRISIL-AMFI Smallcap Fund Performance Index seeks to track the performance of small cap equity schemes
7 CRISIL-AMFI ELSS Fund Performance Index
1-Jun-01 CRISIL-AMFI ELSS Fund Performance Index seeks to track the performance of Equity Linked Saving Scheme (ELSS)
8 CRISIL–AMFI Focused Fund Performance Index
30-Sep-04 CRISIL–AMFI Focused Fund Performance Index seeks to track the performance of focused equity schemes
9 CRISIL–AMFI Value and Contra Fund Performance Index
30-Jun-04 CRISIL–AMFI Value and Contra Fund Performance Index seeks to track the performance of value/contra schemes
10 CRISIL-AMFI Aggressive Hybrid Fund Performance Index
1-Apr-00 CRISIL-AMFI Aggressive Hybrid Fund Performance Index seeks to track the performance of aggressive hybrid funds
CRISIL-AMFI fund performance indices
Research
57
Sr No
Index Inception date
Definition
11 CRISIL-AMFI Conservative Hybrid Fund Performance Index
1-Jan-02 CRISIL-AMFI Conservative Hybrid Fund Performance Index seeks to track the performance of conservative hybrid schemes
12 CRISIL-AMFI Medium Duration Fund Performance Index
31-Mar-10 CRISIL-AMFI Medium Duration Fund Performance Index seeks to track the performance of medium duration schemes
13 CRISIL-AMFI Medium to Long Duration Fund Performance Index
30-Mar-01 CRISIL-AMFI Medium to Long Duration Fund Performance Index seeks to track the performance of medium to long duration schemes
14 CRISIL-AMFI Gilt Fund Performance Index
1-Apr-00 CRISIL-AMFI Gilt Fund Performance Index seeks to track the performance of gilt schemes
15 CRISIL AMFI Debt Fund Performance Index
1-Apr-00 CRISIL AMFI Debt Fund Performance Index seeks to track the performance of the debt funds. The index consists of mutual fund schemes from medium duration, medium to long duration, gilt, dynamic bond, short duration, corporate bond, banking & PSU categories
16 CRISIL-AMFI Short Duration Fund Performance Index
1-Apr-02 CRISIL-AMFI Short Duration Fund Performance Index seeks to track the performance of short duration schemes
17 CRISIL-AMFI Liquid Fund Performance Index
1-Apr-00 CRISIL-AMFI Liquid Fund Performance Index seeks to track the performance of liquid schemes
18 CRISIL-AMFI Ultra Short Duration Fund Performance Index
1-Apr-07 CRISIL-AMFI Ultra Short Fund Performance Index seeks to track the performance of ultra-short duration schemes
19 CRISIL-AMFI Low Duration Fund Performance Index
1-Apr-07 CRISIL-AMFI Low Duration Fund Performance Index seeks to track the performance of low duration schemes
20 CRISIL–AMFI Money Market Fund Performance Index
1-Apr-00 CRISIL–AMFI Money Market Fund Performance Index seeks to track the performance of money market schemes
21 Savings Bank Rate Index
1-Apr-00 Savings Bank Rate Index has been constructed using the following savings rate for the given periods:
58
Notes
Research
59
60
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