Mutual Funds add Rs 4-trillion to kitty in 2016, eyes Rs 20-trn mark in 2017

New Delhi: Helped by growing interest from retail investors and aggressive buying of stocks, mutual fund industry grew at a rapid pace in 2016 with addition of almost Rs 4 lakh crore, or 28 per cent, to its asset base and is looking to cross Rs 20-trillion mark in the new year.

Having already attained a record asset under management (AUM) of Rs 16.5 lakh crore in November, the fund houses are looking to end the year 2016 with a total kitty of Rs 17.3 trillion, industry experts said.

Fund houses are also upbeat about the industry performance in the new year while expecting investment from new investors to fuel the growth of the sector. Also, demonetisation of high-value currency notes could have a positive impact, with the industry betting big on conversion of cash assets into financial investments.

"The assets under management of the mutual fund industry is quite likely to cross the Rs 20 lakh crore mark in next year," Quantum Mutual Fund Chief Executive Jimmy Patel said.

In 2016, the total AUM of all 43 active fund houses put together soared by around 28 per cent on strong inflows in equity, as per industry estimates. This was the fourth consecutive yearly rise in the industry AUM, after a drop in the assets base for two preceding years.

"The equity market has overall been more volatile in 2016 than 2015 with a lot more negative sentiment. The AUM increase can be attributable more to investors staying invested and new investors coming in.

Also, investors may have seen the volatility of this year as a positive to average out costs," said Srikanth Meenakshi, COO at FundsIndia.com, an investment portal for MFs.

"The inflow in equity and equity-oriented schemes and the rise in number of investor accounts also helped in increasing the assets base in 2016. Further, retail investors also appear to have become savvier, using liquid schemes to either earn higher returns or run systematic transfer plans into equity funds to average costs," he added.

The total industry AUM stood at Rs 13.41 lakh crore at the end of 2015 while the same was Rs 11.06 lakh crore at 2014-end. It was at Rs 8.26 lakh crore in 2013 and Rs 8.08 lakh crore at 2012-end.

It stood at about Rs 6.11 lakh crore in 2011. The assets base was about Rs 6.26 lakh crore in 2010 and Rs 6.65 lakh crore in 2009. 2016, however, saw some exits, including by way of mergers and acquisitions.

Those having exited the Indian mutual fund space are JP Morgan MF and Peerless Group. Patel said consolidation is likely to continue next year too and some non-committed or less serious sponsors will exit owing to the stringent net worth requirement of Rs 50 crore.

"Rising cost structure, mainly on account of increasing compliance and manpower costs, will strain economies of survival. Unavailability of trained manpower is also a concern," he added. LIC MF Chief Investment Officer Saravana Kumar said: "As the deadline is approaching, I reckon that those who are choosing to be part of the industry would emerge as stronger, well capitalised players."

A mutual fund pools the assets of its investors and invests the money on behalf of them. It provides diverse investment instruments like stocks and bonds without requiring investors to make separate purchases and trades.

Another highlight of 2016 was an impressive surge in the number of investor accounts and equity folios contributed tremendously to this growth. Retail participation, which continued its momentum from 2015, has shown remarkable resilience to market volatility.

Overall, investor folios rose by 54 lakh to over 5 crore while retail investor accounts -- defined by folios in equity, ELSS and balanced categories -- alone grew by 46 lakh to more than 4 crore.

Equity and equity-linked saving schemes (ELSS) attracted an impressive inflow of around Rs 50,000 crore. The Systematic Investment Plans (SIPs) mode of investments has also gained popularity with more than one crore SIP.

"More investors are choosing the SIP route of investing for equity-oriented MFs. Investors have increasingly appreciated the fact that volatility is part and parcel of MF investments.

As Indian investors are becoming more educated about equity asset class and its superior potential in providing risk-adjusted returns, I believe that equity would see a rising trend of growth," Kumar said.

The year passing-by continued to see a trend wherein net investments by domestic institutions have been more than that of foreign investors. Mutual funds have made a net investment of more than Rs 40,000 crore into Indian stock markets, higher than Rs 28,500 crore pumped in by foreign portfolio investors (FPIs).

In order to bring transparency into the system, the market regulator Sebi put in place 'commission disclosure rule' from October, which is indeed a positive move.

It has also been interpreted by many as a strong push by the regulator to guide investors towards the direct plan which comes with a lower expense ratio as it does not incur expenses towards distributor's commission.

Going ahead, Kumar believes that the mutual fund industry is at a take-off stage of growth. Indian investors are warming up to investments in equity as an asset class.

In 2017, the industry will continue to see a focus on retail investors, who are already showing a lot of commitment and maturity. Besides, SIPs will also occupy a commanding share.

"Current initiative by the government would have positive impact on the investment field -- more people are coming under banking services and banks would offer to cross-sell other beneficial services to these new customers.

We have positive view on stock market which will also aid expansion of AUM," he said. Expressing similar views, Meenakshi said: "The debt market can see support due to the inflows coming in from the demonetisation move. Also, with interest rates continuing to fall, both corporate and retail money can continue to come into debt funds."

For equity funds, there are several key events lined up in 2017 -- union budget, impact of the currency ban on the economy, implementation of the Goods and Services Tax (GST) and global moves.

"But even a volatile year such as 2016 saw investors coming in or investing more. This may well hold for next year as well. Positive outcomes of these events and sustained economic growth can serve to boost markets, and so investors may still come in," Meenakshi added.