How the Indian Mutual Fund Industry Changed in 2021

2021 has been an interesting year for mutual funds. Even though SIPs and equity fund flows have reached record highs, there have been a host of other subtle shifts and trends visible in 2021. On a macro level, the total assets under management (AUM) of the Indian mutual fund segment rose from Rs 30.96. to Rs 37.92 trillion in 2021. This is an increase of 22.46% on the year, with most of this increase coming from equity funds, boosted by a strong performance from Nifty.

How has the plan composition of MFs evolved in 2021

For a long time, debt funds dominated the MF’s total assets under management. If you add debt funds and liquid funds, they are not the most important at the end of 2021.

Mutual fund category Share of AUM – Dec-20 Share of assets under management – ​​December 21 Change of share
Liquid/money funds 17.7% 15.3% -2.4%
Debt-focused funds 33.2% 25.4% -7.8%
Equity funds 40.4% 48.2% 7.8%
ETFs and FOFs 8.7% 11.0% 2.3%

Data source: AMFI

As can be seen in the table above, equity funds have risen strongly this year as low yields and a robust stock market led to a significant shift from debt to equities. Consider debt and cash together as one category. At the start of 2021, debt and cash together represented 50.9% of the MF’s assets under management, while equity funds represented 40.4%. At the end of 2021, the tables have completely changed. Debt and cash now represent 40.7% of assets under management, while equity funds represent 48.2% of assets under management.

How the mix of individuals and institutions has changed in 2021

With more than 11 crore folios in mutual funds and nearly 5 crore folios SIP, retail investors have played an ever-increasing role in overall mutual fund assets under management. At the beginning of 2021, institutions accounted for 47.8% of AUMs and individuals 52.2% of AUMs. At the end of 2021, institutions represent only 45% of AUMs while individuals represent 55% of AUMs. The share gap between individuals and institutions widened from just 4.4% at the start of the year to 10% at the end of the year.

This trend would be accentuated if the current dynamics of SIPs continued. If bond yields rise, as is likely driven by hawkish noise from the Fed, institutions may become more wary of long-term debt funds.

Individuals continue to actively play the equity game

Let’s look at the distribution of individual and institutional investors under different mutual fund categories. Institutions represent 87% of the AUM of liquid funds and 63% of the AUM of debt funds. This is hardly surprising since institutions use cash and debt funds for cash management. However, the good news is that individuals have increased their share of loan fund allocations, hinting at a financial planning approach.

Individuals represent 88% of equity fund assets under management. This is not too surprising, as evidenced by the strong increase in SIPs and retail flows. What needs improvement is that retail accounts for only about 11% of ETFs and FOFs. These passive investments are extremely popular in other countries and individual investors should consider these passive instruments as a separate allocation. However, retailer participation has recently increased in this space.

If you look at the overall portfolio of individual investors in mutual funds, 77% is represented by active equity funds. While debt funds make up 17% and cash funds 4%, passive ETFs make up only around 2% of individual MF portfolios.

Individual investors are geographically dispersed, but wary of direct investments

As of December 21, T-30 cities (the top 30) accounted for 57% of individual mutual fund assets under management. The T-30 itself is not some kind of metro list as the 30th city in the list is Aurangabad. However, what is gratifying is that 43% of individual MF assets are already located in smaller B-30 cities. This shows that the B-30 incentives for distributors really work.

Direct investing (no distributor commission) can reduce costs for individual investors. However, only 21% of all personal assets went through the direct route and the rest through the regular route. Investors in B-30 cities still prefer the distributor route to investing in mutual funds. It’s a mix of convenience and convenience that makes regular funds more popular in B-30 cities, where more than 90% of individual investors still prefer the distributor route.

Finally, retail investors settle for the long term

Indian mutual funds have over 11.2 million folios of which 90% are represented by individual retail investors. One concern has been that retail investors seek short-term gratification in mutual funds, particularly equity funds. But is this really the case?

The reality is that individuals actually take a long-term approach to equity funds. Nearly 42.1% of equity assets have been held for more than 2 years and more than 60% of assets have been held for more than 1 year. The good news is that individual equity fund investors aren’t looking for instant gratification. It’s a happy note to end 2021.

Dolores W. Simon