Retail MF investors' patience is helping provide risk capital to India Inc

The latest Annual Report of the Association of Mutual Funds in India (Amfi) indicates that household investors are rapidly adopting mutual funds (MFs). More retail investors are investing through MFs and they are investing in a disciplined, staggered fashion by using systematic investment plans (SIPs). They are also holding their portfolios longer. All this augurs well for the Indian economy, as well as for the prospects of household wealth creation. As household funds move into equity assets, new businesses receive easier access to capital, which will help boost entrepreneurship. Since fund allocation is done by professionals, there is less risk of capital erosion for investors and funds are deployed across sectors. As equity assets generate high rates of long-term returns, this will enable wealth creation for households.

 

Unsurprisingly, MF folios are growing at a rapid pace. There were more than 235 million folios by March-end 2025, an increase of 32 per cent over the previous financial year. Taken together, retail and high-networth individuals (HNIs) hold over 99 per cent of folios. MFs saw net inflows of ₹8.15 trillion in 2024-25 and assets under management (AUM) hit a record ₹65.74 trillion in March 2025 compared to ₹53.4 trillion in March 2024, a rise of 23.11 per cent. Most investors focus on equity funds, with some of them also looking at hybrid schemes, which comprise income and equity assets. The SIP route is increasingly getting popular. As of March 2025, there were 81.1 million accounts with SIP contributions compared to 63.8 million in April 2024. SIPs’ inflows were ₹2.9 trillion in 2024-25 as against ₹2 trillion in the previous financial year. 

 

Ideally, equity portfolios should be diversified and held over the long term to capture growth trends across the corporate landscape and to allow for compounding effects. More SIP holders are now prepared to commit to a longer-term engagement. As of March 2025, 33 per cent of regular-plan SIP assets and 19 per cent of direct-plan SIP assets were held by accounts that were more than five years old. Over 60 per cent of SIPs were held by accounts that were over two years old. By comparison, five years ago, the proportion of SIP AUM linked to five-year-old accounts was only 12 per cent for regular plans and 4 per cent for direct plans. Apart from diversified equity funds, passive index funds saw inflows rise by 278 per cent, year-on-year, to ₹59,306 crore in 2024-25.

 

Stock markets at times can be manic-depressive with occasional periods of extreme bearishness. The long-term investor, who is diversified across sectors, can ride out such phases. Indeed, SIPs gain during bear markets because the SIP lowers the average cost of acquisition. Given the nature of compounding effects, long-term investors with diversified portfolios generate higher returns and incur less risks of capital erosion. India’s ratio of MF AUM to gross domestic product is around 20 per cent, which is much lower than that in developed economies and indicates considerable scope for further growth. Around 53 million investors hold MFs, compared to over 250 million online shoppers, suggesting that a large addressable population is untapped. Assuming these trends continue, MF penetration should continue to rise. The increasing pool of long-term investors and the given potential will help provide risk capital to India’s business and further enhance its growth prospects.