Increasing participation of retail investors through systematic investment plans (SIPs), flood of pension money, adoption of technology by the players and a rising realization among the investing public that mutual funds are an ideal wealth creation opportunity have helped the Rs 20 lakh crore MF industry achieve critical mass. Along the way, mutual funds have acted as a force-multiplier in capital markets. With big inflows coming via equity, debt and hybrid products regularly, MFs play a huge role in stabilizing and supporting capital markets. This has not only made the profile of capital markets better, but also reduced volatility.
Equity markets driver
Traditionally, the Indian equity market has been driven by foreigners. However, the overseas hot money subject Indian markets to great uncertainty. This has started to change of late. Big fund-houses, with hugely experienced teams and top-class systems, have been able to attract investors, whose investments have been deployed in Indian markets.
Stabilizing agent for stocks -The strong influx of sticky, long-term money in equity mutual funds from systematic investments by retail investors is changing the face of Indian capital markets. For instance, when FIIs sold Rs 146 billion worth of equities in FY 16,mutual funds bought a whopping Rs 661 billion.
Strong and robust inflows from equity and equity linked products have led to MFs becoming an important factor in Indian equity space. Mutual funds’ share of the equity market capitalization in India has nearly doubled from just 2.9% at the end of March 2014 to 5.5% as of March 2017.
Over Rs 4,000 crore of SIP money is coming into Indian markets every month. This has changed the behavior of Indian markets, because investors are soaking up any choppiness.
Pure equity funds, and tax-saving funds earlier shouldered a bulk of inflows into equity markets. However, hybrid funds, popularly known as balanced funds, have emerged as new favorites. With balanced funds seeing a sharp spurt in investor interest in recent years, net inflows have been positive on a sustained basis in the 34 months through March 2017.
Pension money – Another major trend that has lifted the position of MFs in Indian equities space is the advent of passive investments. Traditionally these chunks of money went into fixed return assets, but things have started changing with the Employees’ Provident Fund Organisation (EPFO), the biggest retirement manager in the country allocating a portion of its incremental inflows into equity ETFs. EPFO started with allocating 5% of its incremental inflow of around Rs 1 lakh crore in FY16 to equities, before expanding this to 10% in FY 17, and now plans to use up its full quota allowed, which is 15%. This has boosted the assets of equity ETFs by almost seven times since August 2015 (when EPFO started its investment) to Rs 429 billion as of March 2017.
Date with debt
On debt markets side too, mutual funds have participated in a big way. Fixed income investment forms a significant part of any portfolio since it carries a lesser risk compared with equity. Long-term debt funds tend to benefit more during periods of interest rate decline, while short-term debt funds fare better during periods of rising interest rates. Additionally, debt funds provide tax benet in the form of indexation for holding period of more than three years. Initiatives by bigger fund-houses such as creating awareness, connecting with investors, providing easy to understand facilities have gone a long way in bringing investors to the fixed-income MF side.
Win-win for everybody – The rising participation of debt MFs in debt markets has been a win-win for both industry participants and investors. Debt issuers benefit from being able to get stable funding at low costs. Investors receive secure and predictable cash flows with higher returns compared with plain-vanilla bank fixed deposits. In the long run, this will offers out-sized economic benefits to the country as a whole, and will turn out to be growth-conducive. It becomes especially important for funding the government’s ambitious infrastructure agenda, which is estimated to require Rs 43 trillion in the five fiscals up to 2020.
Rising share in debt issuances – The Indian mutual fund industry remains slanted towards debt-oriented mutual funds including liquid funds. These products account for over 61% of the total assets as of March 2017. With deeper penetration, MFs’ share of debt capital markets have grown. According to data, mutual funds’ share of domestic debt market issuances in the past five years has gone up to 10.4% as of March 2017. Four year back i.e. March 2013, this share was 8%. Clearly, this indicates how mutual funds’ debt holdings increasingly started accounting for more of country’s total debt issuance.
GSecs, corporate & PSU debt – The falling interest rate scenario, growing participation of retail investors and popularity of debt MFs has contributed to stupendous growth in debt markets. According to Sebi data, mutual funds at the end of March 2017 put in Rs 1.2 lakh crore alone in government securities. In March 2014, this amount was less than Rs 40,000 crore. In the commercial paper side, mutual funds have invested over Rs 2.5 lakh crore. This amount was less than Rs 80,000 crore four years back.
Mutual funds have also contributed to supporting corporate debt and PSU debt. Companies floating non-convertible debentures, bonds and other debt instruments have seen good uptake from mutual funds. Put together, MFs have invested over Rs 5 lakh crore at the end of FY17 in corporate and PSU debt instruments compared to less than Rs 1.9 lakh crore in FY14.
Sundeep Sikka, Executive Director & CEO, Reliance Nippon Life Asset Management, writes this piece for FICCI’s CAPAM 2017 Knowledge Paper. Post continues on Page 2.
