Year ahead- Mutual fund industry growth to continue into 2024 backed by strong macroeconomic fundamentals, earnings growth

Year ahead: Mutual fund industry growth to continue into 2024 backed by strong macroeconomic fundamentals, earnings growth

The Indian mutual fund industry, which has witnessed a 125 per cent surge in net inflows and around 24 per cent growth in Assets under Management (AUM) since the beginning of this calendar year, is likely to sustain its growth momentum in 2024, said a report by ICRA. The growth, it added, will be backed by strong macroeconomic fundamentals of the Indian economy and resilient earnings growth.

The net inflows into the mutual fund industry were to the tune of Rs 25,616 crore in the month of November 2023, up from Rs 11,373 crore in January this year. On a year-on-year basis, net inflows surged by 93 per cent as compared with Rs 13,264 crore in November 2022.

The AUM of the domestic mutual fund industry has neared the Rs 50 lakh crore mark in November 2023 and is almost midway to the targeted aim of achieving Rs 100 lakh crore in the next few years. The net AUM stood at around Rs 49.05 lakh crore as on November 30, 2023, up from Rs 39.62 lakh crore as on January 31, 2023.

“The fundamentals of the Indian economy remain intact which has insulated the domestic economy from global shocks. Continuation of the government’s reform agenda, prudent balancing of the fiscal and monetary policy, end of the global monetary policy tightening cycle and a possible interest rate cut by the Reserve Bank of India if inflation remains under control, will be some of the key factors driving higher inflows into the mutual fund industry in 2024,” Ashwini Kumar said.

What are the key regulatory changes that changed the mutual fund landscape in 2023?

During the year, SEBI (Securities and Exchange Board of India) has brought in some changes in the regulatory landscape which has helped channelise higher inflows into the industry. It has permitted use of e-wallet for investment in mutual funds within the umbrella limit of Rs 50,000 per mutual fund per financial year. This apart, it is also mulling to sachetise mutual fund investments going forward.

SEBI is in discussion with mutual fund houses and evaluating ways to make SIPs (Systematic Investment Plan) of just Rs 250 a month viable. The industry has been witnessing a surge in the number of SIPs, with the number of accounts reaching an all-time high of 7.44 crore in November 2023 compared to 7.30 core in October 2023.

“Sachetisation will help drive the financial inclusion agenda and in turn boost the domestic equity markets. It will also channelise higher inflows through the SIP route thereby leading to greater participation of small retail investors,” Ashwini Kumar said.

SEBI has also allowed private equity funds to sponsor mutual fund schemes and permitted the set-up of self-sponsored asset management companies.

With a view to develop the corporate bond market, SEBI has allowed asset management companies to participate in repos on Commercial Papers (CPs) and Certificate of Deposits (CDs).

Higher inflows to sustain

Under equities, maximum inflows of Rs 37,177.98 crore were witnessed in small cap funds till November 2023, while the mid-cap segment also witnessed healthy inflows and the momentum is expected to continue moving forward. Equity funds witnessed inflows for 33rd consecutive months in November. Small-cap funds saw the highest inflows among equity funds at Rs 3,699 crore followed by mid-caps at Rs 2,666 crore and sector/thematic funds at Rs 1,965 crore.

Theme based funds, particularly relating to infrastructure, healthcare and IT, have been gaining steady traction. This apart, the financial services sector is poised for growth, as India is entering a significant multi-year capex (capital expenditure) cycle, marking a pivotal moment for economic growth and prospects of an interest rate cut by the US. The Federal Reserve in the middle of 2024 and lower possibility of a recession is expected to boost the domestic IT sector. All these factors have been drawing investor interest in theme-based funds.

From the debt perspective, long term debt funds may benefit compared to its short-term counterparts. So far during the calendar year 2023, maximum inflows were witnessed in arbitrage funds followed by index funds. The spike in inflows in these segments could be attributed to the change in tax laws for the fixed-income mutual funds which took away the indexation benefit offered to investors until FY23. Moving ahead, markets will be dictated by the outcome of the general elections slated to be held in 2024.

In addition to the above-mentioned factors, movement of the rupee against the greenback, and transaction trends by foreign institutional investors is also expected to have an impact on the markets.