Mutual fund penetration in India is much lower than the world average and many other developed economies. While the US has its AUM more than the country’s GDP at 103 per cent, it is only 11 per cent in India. The world average is 55 per cent. Low penetration of mutual funds in India is also evident from the equity mutual fund AUM to GDP ratio of 4 per cent, compared with 63 per cent in the US, according to the CAMS DRHP. Even the current level is achieved when the mutual fund industry’s AUM grew at a CAGR of nearly 24 per cent between March 2014 and March 2019.
The strong growth in the last five years has been attributed to higher financial savings combined with growing investor awareness of such products. The low market coverage of the mutual fund industry is also seen as an opportunity to grow. Citing a CRISIL report, the CAMS DRHP said that structural reforms such as tax incentives to corporates, formalisation of the economy, growing financial inclusion, higher disposable income, and investible surplus, increasing financial savings, and government schemes focusing on increasing investor awareness can help this industry to grow further.
Investor friendly regulations, ease of investing, digitalisation, and perception of mutual funds as long-term wealth creators are also expected to encourage investors to include mutual funds in their financial savings basket.
Meanwhile, the proportion of gross domestic savings (GDS) in India’s GDP in the past decade has trended down. India’s GDS touched at 36.8 per cent of GDP in FY08 before dropping to 32 per cent in the next year. That was largely on account of a slowdown in public savings, as the government resorted to fiscal stimulus to address the effects of the global financial crisis. For FY18, it had further dropped to 30.5 per cent.
Even the household savings as a percentage of GDP has remained subdued since FY12 with its share in total savings falling significantly from 20 per cent in FY14 to 17 per cent in FY18, mainly driven by a high consumption by household, low job creation and increase in financial liabilities of people to meet short term consumption.