A year of records: MFs on a high, need sustained thrust

That said, there is plenty of headroom for growth, and more needs to be done to achieve sustained and inclusive development of the industry. A look at the key trends reveals the imperatives.

Industry is growing, SIP by SIP

The proliferation of SIPs for investing in MFs has continued unabated through the covid-led market crash, the global geopolitical situation, and the current spike in inflation. That said, any prolonged disruption in the financial markets or liquidity conditions can impact investor experience. That is because investors who entered in recent years have not experienced a prolonged market downturn such as the one seen during the 2008-09 financial crisis. Therefore, investor handholding will be very important to cement growth through SIPs or otherwise.

Investment horizon expanding

An analysis of individual investor investments in equity MFs by age reveals that the maturity horizon among investors holding funds for more than two years has increased to 44%. as of September 2022. from under 40% five years ago. The number of investors in the less-than-one-year horizon bracket remains high at nearly 40% due to the large influx of fresh investments in funds. Going forward, expanding the investment horizon will play a critical role in providing a fillip to the industry.

Debt-side largely untapped

Individual investors in MFs have mostly preferred the equity side (86% of their investments) and shied away from the debt segment due to lack of understanding and competition from traditional fixed-income products. It is important that the industry educate investors about debt opportunities. Product innovation in terms of simple predictable returns—as seen in the success of target maturity mutual funds — can help.

Investor awareness on the rise

Investor awareness programmes such as the ‘Mutual fund sahi hai’ campaign have attracted new investors. Between March 2017, when the campaign was launched, and the end of fiscal 2022, the industry had seen a total inflow of ₹9.23 trillion—30% higher than the inflows seen in the previous five years. Continued thrust to spreading deeper awareness about the products, beyond the vanilla kind, can go a long way in speeding up growth.

Steps such as leveraging intermediation channels, introducing investments and savings in the academic curriculum, and gamification could help.

Intermediation

While the industry is making inroads into the hinterland, there need to be more feet on the street in terms of distributors and use of infrastructure of banks, small finance banks, self-help groups, and India Post to ensure last mile integration with investors of the B-30 cities. The usage of technology is also resulting in a rising number of do-it-yourself investors opting for this cheaper route of investment. Sufficient guard rails should be provided in the technology platforms to direct the investors to suitable products based on their risk-return profile and investment horizon.

Summing up

MFs are on a strong footing, and we have plenty of reason to believe the products and services offered by the industry would see rapid uptake in coming years. All this, however, would depend on how the key drivers pan out and how the challenges are handled. A holistic development of the industry by meeting the needs of the investors would ensure a win-win situation for all stakeholders.

Jiju Vidyadharan is senior director, CRISIL Market Intelligence & Analytics.