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Mutual funds: Shift towards non-debt asset classes

Madan Sabnavis
mutual fund, non debt assest class, ETF schemes, Mutual Funds industry, equity scheme

The Indian mutual fund (MF) industry has shown an impressive growth, especially in the last two decades, not just in the scale of assets under management (AUM) but also in terms of number of folios. The size of the industry almost doubled in the past three years (from Rs 10.8 lakh crore in FY15 to Rs 21.8 lakh crore in FY18) and quadrupled in the past 10 years (Rs 5.1 lakh crore in FY08). As on December 2018, the Indian MF industry had a total of 803 lakh folios, out of which 76% were of equity/growth oriented schemes, 14% of debt/income oriented schemes, 8% of balanced schemes and remaining 2% of Exchange Traded Funds (ETFs) and fund of funds investing overseas.

The AUM grew at a CAGR of 27% from FY14 to FY18. In FY19, AUM grew to Rs 22.85 lakh crore as of December 2018, registering 7% growth over March 2018. Scheme-wise resource mobilisation Debt and equity schemes today cumulatively account for 86% of the total AUMs, while the rest comes from balanced, ETF and fund of funds investing overseas.

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The share of equity and balanced schemes have increased over the years, which were earlier dominated by debt schemes. Debt schemes have seen a fall in share from 73% in FY14 to 53% in FY18. At the same time, share of equity schemes has increased from 23% in FY14 to 35% in FY18. Share of balanced schemes has also risen from 2% in FY14 to 8% in FY18. This shows the movement of funds towards non-debt asset classes.

The fall in share of debt schemes continued in FY19 (up to December 2018), where share of debt, equity and balanced schemes were ~50%, 37% and 8% respectively (compared with 53%, 35% and 8%, respectively as of March 2018). In fact, FY19 (up to December 2018) has remained a positive year for equity schemes (net inflow of Rs 0.9 lakh crore), ETF schemes (net inflow of Rs 0.26 lakh crore) and balanced schemes (net inflow of Rs 0.12 lakh crore). However, debt schemes witnessed net outflows worth `0.42 lakh crore during the year. Deployment of funds by MFs There has been a steady shift towards corporate debt paper, which includes floating rate bonds, non-convertible debentures, etc.

The share of this instrument in total funds deployed by debt MFs, was up from 21% in March 2014 to 38% of total debt AUM in March 2018. Total exposure to this instrument in December 2018 stood at Rs 4.5 lakh crore. Investments in commercial paper (CP) rose from 15% of total debt AUM in March 2014 to 24% in March 2018. As of December 2018, debt MFs invested Rs 3.8 lakh crore in CPs, compared with Rs 3.06 lakh crore in March 2018. July 2018 witnessed a peak in investments in commercial papers, due to increasing allocation to NBFC sector.

Equity MF: The top five sectors where equity MFs deployed their funds in March 2018 have remained constant since March 2014, except for a new sector finance being included while replacing auto sector. Deployment of funds in the finance sector has risen over the past five years and as of December 2018, it attracted the second biggest deployment of funds by equity MFs. On comparing the deployment of funds in top 10 sectors in December 2018 with March 2018, a rise in share was witnessed in sectors such as bank, software, consumer non-durables, pharmaceuticals and petroleum products. Deployment of funds by debt MFs has undergone a major shift in the past five years, in terms of increased allocations to instruments such as corporate debt, commercial paper and reduced investments in certificates of deposit.

(The writer is chief economist, Care Ratings. Edited excerpts from report on Indian Mutual Funds industry)