The year 2018 has proven to be a year of consolidation for the mutual fund (MF) industry as it had to face multiple headwinds in the form of tighter regulations, credit events and volatility in the equity and debt market. The average AUM of the MF industry has grown by 11.40% in FY19, as compared to a growth of 21.74% in the previous year.
Indian MF Industry had witnessed strong growth in its AUM in FY18 and FY17 driven by increased interest in financial savings instruments post demonetization and a bull market in equities. Equity Mutual Fund AUM grew by 19% in FY19 (Nifty 50 index rose 14.9% in the same period). It is noteworthy that AUM of Indian mutual fund industry has grown at a CAGR of 21.76% in the last 4 years, as the macro-economic environment improved significantly, and investors turned their attention towards financial savings. Equity AUM grew at a CAGR of 27.04% in the same period.
One important trend which is becoming visible is the strong SIP flows of around Rs.8000 crore per month on an average. Consistent SIP inflows provided the much-needed stability to equity markets countering FPI outflows, as Indian investors matured over time. In spite of FPI selling in Indian equities throughout 2018, Indian equity markets remain supported by the domestic flows.
The year 2018 also saw SEBI getting more stringent on transparency with measures such as putting a cap on Total Expense Ratio (TER) and asking fund houses to adopt full trail model of commission in all schemes without payment of any upfront commission. However, after the introduction of LTCG tax and a dividend distribution tax on equity oriented mutual funds, balanced fund category, which had been a major recipient of investor flows, lost its charm and grew at a mere 4.9% in FY19.
In the debt segment, gilt funds saw a decline of nearly 28.9% in AUM due to high volatility in bond yields. The growth in the income category remained low at just 9.2%, as IL&FS issue in the month of September kept the investors guessing.
In the last 2 months of this year, FPI flows have seen a strong comeback. The change in monetary policy stance by major central banks (US Fed, ECB) led by slowing global growth, have also driven the risk-on rally in emerging market bonds and equities.
As far as an investment opportunity is concerned, investors who are risk-averse in nature can look at Dynamic Asset Allocation or Balance Advantage fund category as it provides better risk-adjusted return and those who can withstand the volatility can look at small-cap space as valuation has become reasonable after sharp sell-off in 2018.
In the debt segment one can look at corporate bond segment as on one side it provides a net (post expenses ) YTM (yield to maturity) in the range of 8%-9% which is very attractive and on another side this segment has a better quality of portfolio (more than 80% invested in the highest rated paper).
(By Rahul Parikh, CEO, Bajaj Capital)