Mutual funds' share in m-cap at a new high

MFs' share up from 2.9% to 4.5% in past two years thanks to consistent inflows, rising stock prices

Domestic mutual funds (MF) now account for 4.5 per cent of India’s total market capitalisation (m-cap), up from 2.9 per cent two years ago. The rise comes amid robust and consistent investor flows into equity schemes, rise in stock prices, and market-beating performance by fund managers. MFs’ share in domestic m-cap is at record levels and significantly higher than 2007-08 levels, which is considered to be a boom period for the mutual fund sector. In January 2008, equity assets under management — as a percentage of overall m-cap — were just 3.48 per cent. Investments into equity schemes are mostly from retail investors.

Since May 2014, after the new government took charge, inflows into equity schemes have totalled a whopping Rs 1.75 lakh crore and it goes without saying that a large part of these investments has been invested into stocks. Nimesh Shah, managing director and CEO of India’s largest fund house ICICI Prudential Mutual Fund, says investors have made a shift away from physical assets to financial assets.

“Investors have become aware of the advantages of consistent investing, which has helped the industry. A positive investor experience will help make sure retail investors continue to take exposure to the markets through the mutual fund route, rather than direct investing.” Industry players say investors put in around Rs 3,000 crore a month through the so-called systematic investment plan (SIP). The flows through the SIP route had dropped to around Rs 800 crore a month a few years ago. The number of equity folios has risen by seven million over the past two years — from 29 million to nearly 37 million now.

“There has been a welcome increase in domestic MF ownership of Indian equities over the past three years. There is a clear shift in domestic appetite for financial assets over hard assets like real estate and gold. Our fiscal and monetary policies have strengthened the case for financial assets over hard assets. India’s strong macroeconomic platform and potential for higher growth have also strengthened the case for equities,” said Vetri Subramaniam, chief investment officer of Invesco Mutual Fund.

He added the sector’s good track record and SIPs have contributed to the growth.

The increase in dominance of mutual funds will act as a good counter balance to foreign flows, say experts. Foreign institutional investors’ share of India’s m-cap, however, is significantly higher at 20 per cent.

“There is still a lot of potential for mutual funds to grow. Investors are fast learning the importance and need of investment in mutual funds. The industry’s responsibility will increase as more and more retail investors look towards mutual funds for wealth creation,” said Sundeep Sikka, chief executive officer of Reliance Mutual Fund.