Crosses Rs. 16.5 Trillion in Asset Under Management

SIP accounts crosses 10 Mn with monthly collection of Rs. 3.7 Billion

Genesis of Mutual Funds

‘Mutual fund’ is an investment vehicle that allows several investors to pool their resources in order to purchase stocks, bonds and other securities. Historians are unsure but they were first in the Netherlands by a Dutch merchant named ‘Adriaan van Ketwich’ in 1774. He theorized that diversification would increase the appeal of investments to smaller investors with minimal capital. The name of Ketwich’s fund, Eendragt Maakt Magt, translates to “unity creates strength”.

The next wave launched in Switzerland in 1849, followed by similar vehicles created in Scotland in the 1880s. The idea of pooling resources and spreading risk using closed-end investments soon took root in Great Britain and France, making its way to the United States in the 1890s.

Enter India

In India, Mutual funds industry started in 1963 with formation UTI by RBI and GoI. Its was formed with following objective:

(i) To encourage and pool the savings of the middle and low income groups

(ii) To enable them to share the benefits and prosperity of the industrial development

UTI remained monopoly till 1987 and then number of other govt. Institutions also established their funds. It provided significant hedge to investors from risk with their buy-back scheme and tax incentives.

UTI Debacle

In 2001, Indian stock market took a huge hit coupled with Ketan Parekh scam. UTI closed the doors against investors in its traditional “blue chip” — Scheme (US-64). As UTI was not able to provide promised liquidity 70,000 crores was stuck.

When the crisis of US-64 came into the open in 1998, Government did a quick cash injection of around Rs. 3,300 crores to shore up the UTI. There were number reasons behind this but most important was that UTI didn’t had any transparency as UTI wasn’t revealing the portfolio or the net asset value (NAV) and giving assured returns with equity portfolio. Finally, to resolve this, UTI assured unit holders having 5,000 or less units that their units would be redeemed any time between 1 August 2001 and 31 May 2003. The incentive to hold on was the promise of Rs 12 for every unit worth Rs 10, if it was redeemed in May 2003. The assets of UTI were divided into UTI-I and UTI-II. The government took responsibility for UTI-I, to which US-64 and all the assured return schemes of UTI were transferred. UTI-I came to be known as SUUTI and UTI-II became UTI Mutual Fund. SUUTI over time returned money to investors.

Post that, mutual fund industry became much regulated and controlled but also got lot of private players. AUM also grew from ~1.2 lac crores in 2003 to ~16.5 lac crores in Sep-16.

Growth Stage

In 1971, John Bogle did a study that 75% of the all mutual funds generate lesser returns compared their benchmarks and were still charging hefty fees of ~3%. Also, stock market in US was built for large investors and shown traits of being semi-strong to strong. So, generating higher than market returns (alpha) was not easy.That became base to launch The Vanguard Group, known for low-cost index funds. These new mutual funds made a major contribution to the Mutual Fund penetration in US. The major reason was two-fold one market exploded for couple of decades and index funds were simple to understand.

India is Different

Indian stock market still have ‘alpha’ left in both equities as well as debt market. Debt market is not at all liquid so direct investing is near to impossible. In equities, its becoming clear than investing in Large Cap Equity funds have limited benefits as same can be achieved at much better cost via index funds. Also, with emergence of direct mutual funds the expense ratio when down by ~1% which is makes mutual funds in India much attractive than index funds.

So, the point I am trying to make here is that Indian mutual fund industry will not go the index fund way like it did in US atleast in near future.

Current State

Mutual fund penetration as % of GDP

US: 80% of GDP

China: 7% of GDP

India: 7% of GDP

US market has clearly embraced mutual funds but China hasn’t. There is very local reason behind that. In China, people invest directly in stock market than going via mutual funds. It may be they don’t have many mutual fund option as the industry in relatively closed or they don’t want to.

My sense is that India penetration will in between China and US probably around 30–40% levels so we have huge head room left.

India — Recent changes will have huge impact

Indian ecosystem is changing very rapidly which is helping mutual funds to grow faster than ever. There are a few tail winds flowing that will lead to growth explosion.

Aadhar/India Stack/Jan Dhan Yojna creating the basic infra

Paperless transactions via mobile making it frictionless

No other option (Interest rates are down, Real estate is down, Gold lost shine)

Future — Tech will prevail

With regulator’s constant focus to reduce cost and at same time making it accessible to everybody, the only saviour will be technology that’s scalable and cheap. Most of the old methods like Cheque payments, Form filling, physical KYC, Offline advise will go away.

Machine Learned and Data Driven decision is also not far. It will solve problem of understanding customers and matching them with right products and at the same time building investing strategies using huge data.

A Glimpse into the Future

Ravi starts a new job and on day of orientation he is explained the benefits of start investing early. He downloads an app and enters his Aadhar credentials. His advisor account and salary account both gets created and are linked using UPI.

Now he start getting notification about investment. He starts learning about investing and at same time bot is learning about Ravi so that it works for him better. When Ravi gets his first pay check, a bot recommends him to make his first investment. He click yes and transaction is completed. At the same time, mutual fund gets an order it makes a back to back investment in stocks with strategy given by fund manager. Fund manager has deployed a ML algorithm that provides him predictive strategies on the market that he deploys strategy as per fund objective.

Rest of the money Ravi uses to buy stuff for his family. Now every month his salary getting invested in mutual funds that matches with Ravi’s risk tolerance with best returns possible. His tax savings are also being done every month. Its all almost at no cost.

Changing for good continues…..

Image credits to IndianExpress.