The digital revolution in India is being acclaimed over the world.
The country is on the path of breakthrough, whereby, several innovations are coming in the space of technology.
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Ever since, demonetization was announced on November 8, 2016, the economy has been witnessing a rapid growth in terms of digitization and we are collectively moving towards the cashless economy.
From a parallel economy that was prevalent before 2016, a sizeable shift is seen in towards the digital era.
Events that unfolded in the last two months of 2016 provide both opportunities and challenges that are faced by the mutual fund industry in India.
Investors have gradually started to adopt mutual funds as their new avenue of investment.
How has the mutual fund industry faired?
Even though it may not be suitable for all types of investors; even then, the sector has witnessed tremendous growth.
During 2016, particularly in the last two months, the market witnessed events such as demonetization, the unlikely presidential win of Donald Trump, Brexit, and increasing oil price.
Despite these developments, the mutual fund industry in India reached an asset base of 17 lakh crore INR, of which around a quarter was seen in 2016.
The industry had a compounded annual growth rate (CAGR) of 18% over the past decade, despite the slowdown witnessed during 2010–13.
Until now, there had been a lack of awareness about financial instruments and very low personal finance planning.
This has resulted in a lower inflow of dynamic investments in a country like India.
What has worked?
Systematic investment plans (SIPs) contributed the most to the rapid growth of the industry.
Over 1 crore customers have active SIPs and the industry is adding over 6 lakh SIP accounts each month with an average ticket size of Rs 3000 per month per account.
Of the total inflow received every month, around 50% is contributed by SIP accounts.
How has the industry faired in terms of geography?
The AUM for the B-15 cities (read as beyond (top) 15 cities) recorded a growth of over 30% in 2016, that was way higher than the industry average.
Of the total contribution, more than 50% came from SIP investments.
How it is likely to grow?
The industry is in its infancy despite strong growth seen in the past.
When compared with the western world, the Indian equity market has started to grow while the Indian debt market has not had a sizeable presence.
Mutual funds play an important role in penetrating the capital market in the Indian population.
At present, the penetration of the capital market is below 5% that provides a tremendous opportunity for growth.
The industry is likely to grow at over 20-25% over the rising base.
This will be backed by favorable demographics, rising per capita income, and government initiatives to make the financial service sector lucrative.
Which products are likely to support the growth?
We believe traditional products such as Equity Linked Savings Scheme (ELSS) and equity funds will continue to be the demand puller for the sector.
However, new innovative products such as the Alternative Investment Fund (AIF), Real Estate and Structured Credit, Infrastructure Investment Trusts (INVITs) and the likes should provide a boost when approved by the regulator.
To further push the acceptance of mutual funds, market regulator SEBI (Securities and Exchange Board of India) has been introducing several reforms.
In 2013, the regulator introduced direct plans, whereby an investor can bypass the agent and save on commission.
In addition, extensive investor education, streamlining of funds by re-categorization of the existing funds, limiting the number of funds in each category and putting a ceiling on expense ratio with a high degree of declaration and transparency, are some of the moves that the regulator has announced in the past five years period.
We believe that while the regulator has made a tremendous effort in the past five years, the industry has not seen the expected development.
The investment in the direct plan is less than 15% of the total asset, of which the contribution from B-15 cities is in the low single digit.
This presents a sizeable opportunity for companies like Groww to penetrate.
Last week, the regulator has come up with guidelines whereby the incentive of selling funds in B-15 cities is higher than top cities; this is likely to see increased efforts from the distributors.
To conclude, we continue to see immense potential in the industry and believe that as and when the investors get the right education about dynamic investment products, they shall join the bandwagon.
We also believe, companies like Groww will contribute significantly to writing the growth story of the Indian mutual fund industry.
Also Read: Is it wise to time the market?
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