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Mutual Fund AUM attains new heights: Why should you continue your MF investing?

ICICIdirect 9 Mins 16 Jan 2024

The Association of Mutual Funds in India (AMFI) released the total Asset Under Management (AUM) data ending December 2023. We have achieved a new milestone as the mutual fund industry crossed the Rs 50 lakh crore AUM. The key highlight of this milestone is that it took only 13 months to go from Rs 40 lakh crore to Rs 50 lakh crore.

Let us understand the significance of this number in more detail in this article. Stay with us till the end, and we will also tell you why you should continue to invest in mutual funds.

The Growth Story

The Indian mutual funds' AUM reached the Rs 10 lakh crore mark in May 2014. It took more than 50 years for the first 10 lakh crore in AUM. However, the subsequent addition has been relatively faster.

The AUM crossed the Rs 20 lakh crore and Rs 30 lakh crore mark in August 2017 and November 2020 - both took little over 3 years. The next milestone, Rs 40 lakh crore, was achieved in only 2 years, in November 2022. The latest one in 13 months.

Experts believe that the next major landmark of Rs 100 lakh crore in AUM will come in less than a decade. At present, the total investor base is 4.21 crore, and we must have around 10 crore investors to reach the 100 lakh crore mark.

AUM

Milestone Month/Year

Time To Reach

10 lakh crore

May 2014

NA

20 lakh crore

August 2017

Little over 3 years

30 lakh crore

November 2020

Little over 3 years

40 lakh crore

November 2022

3 years

50 lakh crore

December 2023

13 months

Can we reach 10 crore mutual fund investors?

As mentioned, we are currently at 4.21 crore. How can the number of mutual fund investors increase? AMFI has plans to reach out to more people:

  • Inclusion of middle-income households
  • Distribution outreach
  • Digitization

The crucial question remains: can they achieve growth numbers through these strategies? Let us try and answer.

What is the basic requirement to invest in mutual funds? Or let us put it this way: a requirement for regular investment? The investor should have an online presence (it makes things super simple).

How many people in India fall into that category? We try to infer indirectly: as per the latest numbers, over 50 crore people have OTT subscriptions, 25 crore people ordered food online last year, and 20 crore did online shopping.

Even if we take online shopping as the benchmark, we can multiply 5x from current levels. What is even more interesting is that the number of online shoppers is also increasing every year.

Some may argue that not every online shopper will have enough savings. Right, but then what about those who ordered food online? All they need to do is reduce one order every month to start mutual fund investing! 

It would be fair to assume that those shopping online or ordering food online know about the mutual fund. Also, the amount is not a problem! Then, why aren't more people investing?

Comparing OTT and online orders with mutual fund investing is not a fair comparison. But we are not comparing here! We are trying to get the numbers!

Buying a dress online or ordering your favorite food is a different thing; the end goal is met immediately (in a few days for online shopping). It brings people happiness, too. When it comes to investments, the results come after years, and there is a fear of losing money in this period (lack of understanding).

Also, picking mutual funds is not the same as ordering your food - there are over 2,500 mutual funds, and to compare them, one needs to learn the expense ratio, AUM, returns, and many other ratios.

To sum up, the problem lies in the lack of knowledge. The solution is educating people and making them aware of the risk-return ratio associated with mutual funds. For this to happen, we need to have many more distributors in India than the current 1.5 lakh (the active and large ones are perhaps one-tenth of this number). 

The Road Ahead

MF AUM as a percent of the Gross Domestic Product (GDP) for India is only 14%. For countries like Brazil (72%), South Africa (45%), and China (23%), the ratio is much higher. Developed markets have nearly 100%. For sure, there is a lot of potential growth, but everyone in the system has to join hands and contribute to the system in a meaningful way.

Why should you continue investing in MF?

The increase in mutual funds AUM can be a positive indicator for various reasons, and it may provide investors with compelling reasons to continue or consider investing in mutual funds. Here are some reasons:

  • Access to Various Asset Classes: Mutual funds provide access to a wide range of asset classes, including equities, fixed income, and alternative investments. It allows investors to create a well-balanced and diversified portfolio based on their risk tolerance and investment objectives.
  • Liquidity: Mutual fund units are generally liquid, and you can buy or sell them at the end of each trading day at the Net Asset Value (NAV). Liquidity provides flexibility for investors to manage their investments based on changing market conditions or personal financial goals. With a larger pool, liquidity will never be an issue.
  • Economies of Scale: As AUM increases, mutual funds may benefit from economies of scale. Larger funds can potentially negotiate better fees, which may result in lower expense ratios for investors. Lower expenses can contribute to better overall returns for investors.

We hope to cover the next milestone of 60 lakh crore soon. For that, existing investors should continue their mutual fund investments while many more join the club.

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