Macquarie sees long runway for growth for Indian MF industry

AUM-to-GDP ratio still at just 15%, compared with global average of 75%

The Indian mutual fund (MF) industry still has a long runway for growth despite seeing its assets rise by fivefold in the past decade, almost twice the growth clocked by bank deposits.

The overall number of MF folios has increased from 40 million in 2014 to nearly 100 million. Yet, the potential for growth remains large. To put things in perspective, the banking system has more than 2 billion deposit accounts, implying that the MF industry is just 5 per cent of the banking system. The mutual fund assets under management (AUM)-to-GDP ratio in India is at 15 per cent versus a global average of 75 per cent, according to Macquarie.

The assets under management (AUM) for MF and insurance channels combined have risen significantly in the past five years and now account for 50 per cent of bank deposits, according to Macquarie Research. The quantum of savings disintermediated by MFs increased from 11 per cent of bank deposits to 13 per cent between 2011 and 2016. This figure further rose to 20 per cent by 2021.

It is not just equity funds that have driven this increase. Almost 70 per cent of the AUM was contributed by non-equity funds at the end of March last year. And two-thirds of this non-equity AUM was contributed by debt funds, which have seen some consolidation over the past three years led by a tight liquidity environment and risk-aversion post the IL&FS crisis.

“There has been broad-based growth in AUM, reflecting a general acceptance of mutual funds as an important part of individual investor’s portfolio and not just as a vehicle to punt in the equity market,” Macquarie’s report observed.

The primary reason for the AUM growth is the concerted industry campaign to promote the benefits of investing for the long term through systematic investment plans (SIPs). SIPs have seen secular monthly flows over the last five years, driven by increased retail participation.

There were almost 50 million SIP accounts at the end of last year and the AUM of these accounts constituted 15 per cent of total AUM of the MF industry. In the last two years, the number of such SIP accounts have risen 65 per cent and the AUM through these accounts have gone up by almost 80 per cent.

Indian households had invested more than 5 per cent of their annual savings in capital markets in only five of the last 20 years – FY06, FY07, FY08, FY17 and FY18. Today households are estimated to have invested 8 per cent of their savings in capital markets.

“Despite having 2 billion deposit accounts, bank deposits continue to grow in double digits. Thus, the mutual fund industry can quite comfortably continue to grow at 20 per cent for the foreseeable future,” said the report.

Similarly, while the AUM for the insurance industry was up nearly fivefold since 2010 and is now equivalent to 30 per cent of bank deposits, the country’s insurance density is less than 20 per cent of the world average and lower than several emerging markets.