Mutual Fund sahi hain, the high voltage campaign launched by the Association of Mutual Funds in India, is nudging people to invest through mutual funds. There is a reason for that. Mutual funds actively manage money. They have fund managers who use sophisticated tools to analyse businesses for financial performance. They decide the right time to buy shares of companies.
It works. Over the past five years, there are as many as 23 mutual fund schemes that have more than tripled the value of the investment made, according to a Press report. Frontline benchmark indices like Nifty and Sensex have clocked a return of 72 per cent in that time. The Nifty Midcap index has grown 133 per cent in value. So, actively managed funds have managed to clock returns that topmost benchmark indices.
Over the past five years, your bank and fixed deposit rates have declined, public provident fund rates are down and gold prices are sluggish. Inflation has hovered around four to six per cent during the period.
A superlative performance like this is not a norm. This typically happens in early stages of the mutual fund industry. While mutual funds in India are not new, there are not many people who are making the most of the growth that mutual funds are offering.
The same association regularly puts out the data of money that mutual funds collect and the number of new investors coming on board. Sure, total assets managed by mutual funds have more than doubled in the past five years to Rs 22,00,000 crore. To put things in perspective, bank deposits in India are around Rs 1,17,00,000 crore. Mutual funds today account for 15.7 per cent of the total size of bank accounts. This is higher than 11 per cent five years ago.
The total number of mutual fund investor accounts represented by a number of folios has surged to 7.13 crore. It was around 4 crore five years back. Clearly, the high profile campaign is showing results according to these headline numbers. However, things are not that rosy as they appear. There are a number of challenges out there that headline numbers do not show.
Folio front
Of the total 7.13 crore folios, unique investors are about fourth of that number. It really means one investor has four folios. Effectively, in a country of 130 crore people, India has just about 1.8 crore mutual fund investors. The average in rich countries is over 80 per cent.
Most MF investors in Maharashtra
Maharashtra remains a dominant force in the mutual fund industry. It accounts for over 40 per cent of the total assets under management. Investors in Delhi come a distant second, according to the AMFI data. The spread of mutual funds is skewed in that aspect. Mutual funds and industry associations like Amfi would have to concentrate on reaching out to other states to spread the message. While Maharashtra accounts for 20 per cent of India’s bank deposits, the number is much higher in the case of mutual funds. Clearly, the message has to go beyond. RBI has already observed that Indians predominantly shun financial assets in a detailed household finance survey last year. Mutual funds are an easy route to take.
It gets tough to repeat superlative performance
As the mutual fund industry matures, generating superlative returns gets difficult. With more investors seeking to enhance their wealth using mutual funds, there is a scramble for quality businesses or debt securities of high credit rating. India’s financial markets are short on both. If you speak to fund managers, they would say that there are about 200 to 300 companies that can be termed as quality companies out of over 5,000 listed. So, as more money flows into equity mutual funds, it will be soon a case of too much money chasing too few assets. The only quality debt paper is the government bond in India. There is a very limited secondary corporate bond market in India, unlike in the US. Globally, a lot more money is held in bond markets than in equity. In India, about 30-40 per cent of assets under management are in equity.
Investors need to make the most of the opportunity now. The thinking about investing should follow a simple process of realisation that creating wealth is not possible without beating inflation. To beat inflation, you need to know what to buy and equity assets have to be a part of your portfolio. While mutual funds are performing well in India, they may not be able to sustain this superlative performance. Yet, mutual funds are a vehicle to own multiple assets for those who are yet to experience investing.