'Bite-sized SIPs will lead to doubling of MF's AUM to Rs 100 trn by 2030'

Bite-sized SIPs generated from growing household savings are billowing sufficiently to push India's mutual fund industry to double its AUM in 5 years, expects Axis Capital's Praveen Agarwal

The cumulative power of bite-sized systematic investment plans (SIPs) from households will lead to a doubling of assets under management for India’s mutual fund industry to Rs 100 trillion by 2030, according to a new report by Axis Capital. 

 India’s mutual fund industry doubled its AUM in just four years to reach a landmark Rs 50 trillion in December 2023.  Prior to this, the industry took five years to double its AUM from Rs 12 trillion to Rs 25 trillion. The report expects retail participation, which has seen a substantial increase over the years. (60% vs 45% in 2016), to accelerate with rising savings.

Retail will be a key enabler, with millennials leading the pack

Axis Capital sees this trend gaining traction given the better profile of returns that equity AUM has generated for retail investors relative to overall AUM across traditional investment instruments. Underscoring the large opportunity, Axis Capital's Praveen Agarwal, Amit Jain and Shailesh Prasad  point out that mutual fund penetration is at just 15% of GDP, far below the global average of 74 per cent.

Equity AUM growth to remain higher than overall AUM growth

 Equity + ETF proportion to continue gaining share

Equity AUM dominates the industry, with a 56% share in the total AUM as of December 23 as opposed to just 30 per cent in FY16. Equity with ETFs together constitute 70% of the total AUM. SIP has emerged as a strong enhancer of equity AUM, with an average ticket size of Rs 2,300.  "Lower returns on bank FDs have also contributed to the rise in equity AUM. On the other hand, the share of debt AUM has been steadily declining. Retail participation in debt mutual funds is extremely low, given the unattractive returns and weak understanding; it was largely used by institutional investors to manage treasury operations. With corporate balance sheets strengthening, leverage has been steadily declining, resulting in the decline in debt AUM," said the report. 

Overall assets under management is up 20 per cent CAGR (FY14-24E), while equity AUM has seen a sharper increase of a CAGR of 32 per cent over the past ten years (FY14-24E). A much sharper increase in the equity AUM was seen since FY19 when equity AUM rose from Rs 10 trillion to Rs 29 trillion in 45 months.

"Equity AUM grew at 47% YoY as of January 2024, of which only 13% growth was contributed by net flows, while the other 34% came from mark to market ( MTM) gains on equity investments. This tends to remain volatile, but FY21 onwards, the contribution of MTM to equity AUM growth has been much higher than net inflows, given the upbeat equity markets," noted the report.

Axis Capital sees share of equity AUM increasing to 60 per cent by 2030

The current monthly run-rate for SIP is Rs 170-180 billion and Axis Capital assume a similar run-rate with an improving trajectory. Simply put, it has assumed that equity appreciation will be offset by redemptions, though there could be upsides from here as well. It assumes debt mutual funds will see a CAGR of 9% given the low retail participation. 

At least 44 per cent of total equity inflows in FY23 were through SIPs & NFOs

SIPs are seeing monthly inflows of Rs 170-180 bn, almost 5x of the 2016 levels. The number of total SIP accounts has been steadily increasing and is currently at 79 million vs just 21 million in January 2021 (adding 2 millionn+ net new SIPs every month). "Higher participation from millennials and contribution from smaller cities increasing penetration and ticket size along with lifegoal-based investing will keep the flow steady," said the report. 

Yearly SIP Trend

5 million new millennials started an SIP over FY19-23 with an investment value of $500 millionn+ in FY23 while the number of retail investor folios has increased 3x in the past decade. Almost 90% of AUM contribution by retail on SIPs goes towards equity AUM.

"Individual investors are more into equities, as is evident from the data. An analysis of the breakup of retail AUM suggests that the share of equity in total AUM has risen from 44% in FY14 to 83% currently, largely because equity mutual funds have been able to generate alpha vs other investment options, which remains the main attraction. Debt funds, on the other hand, remain unattractive, given their relatively low returns and more so, the dearth of education about their benefits," said the report.

AUM break-up by category of investor

Other key highlights 

SIP democratizes equity investing, everyone is an investor

1. Household savings are likely to grow 11% CAGR as India’s GDP reaches $ 7 trillion by 2030.
2. The report assumes the prevailing $200 mn gross monthly SIP flow will grow over 3x by 2030E as Indians deploy more into financial savings.
3. 4 million n new SIP accounts were created in Dec’23; Jan’24 saw 4.6 million new demat accounts.
4. Share of equities in household assets has doubled in the past 10 years (to 4.7%)