Equity MF AUM

The sharp rise in AUM is gratifying but also brings challenges…

The month of October 2017 saw new heights reached by Indian mutual funds in terms of assets under management (AUM). The overall MF industry touched an all time high AUM of Rs.21.40 trillion ($330 billion), of which nearly 1/3rd was in terms of equity fund collections. This sharp rise in equity AUM has created a real counterweight for the FPIs to the extent that FPI selling did not really have any negative impact on the Nifty levels. However, the question is why is this surge in equity MFS happening and whether it is sustainable?

It is about the TINA factor…

A lot of retail investors are investing in equities largely because there is no alternative. Debt yields are drastically down and debt is seen as less efficient in tax terms. Real estate, which was a preferred destination for retail investors, has come under the lens of the tax authorities after the passage of the RERA and the clampdown on benami properties. Retail investors are also getting wary of gold as the government has already imposed limits on gold holding per family. The highly popular endowment plans of insurance companies are also under the scanner as these are likely to lose their allure once they shift from the EEE basis of taxation to the EET basis of taxation. So, effectively what is left for the retail investors are equities and that is where most of the retail money is now going. Equity funds are the obvious magnet.

There is an interesting argument as to why retail and small investors prefer the equity funds route. While there is a good bit of flows coming from HNI investors, the sharp increase in the number of active SIPs is an indication that the retail is adopting equity funds in a big way. That is good news from a long-term wealth creation perspective.

But, MFs need more choice…

That is where the real challenge begins. If the tide of flows into equity funds continues, the mutual funds will really need solid avenues for deploying their money. Most of the large-cap stocks are already over-owned by most mutual funds. The supply of large caps is not really increasing and even the supply of quality paper is not coming into the market. In the recent past, we have seen some quality new entrants like SBI Life, New India Assurance, GIC Re, BSE, HDFC Life and ICICI Lombard. If a quality paper does not keep pace then we will get to see price inflation as too much money chases too few stocks. That is not a comfortable situation to have. We are already seeing that in mid-cap funds. In fact, many mid-cap funds are beginning to close their funds for fresh subscription considering that the choice in the market is just too limited. Indian markets need quality paper to keep pace with the rapidly expanding AUMs of equity funds. That could be the biggest challenge for Indian MFs as they enjoy a deluge of liquidity! ©

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