SIP-shape

Retail investors catalysing growth

of mutual funds in India
August 2019

Research
 Analytical contacts

Prasad Koparkar
Senior Director, Funds & Fixed Income Research
prasad.koparkar@crisil.com

Bhushan Kedar
Director, Funds & Fixed Income Research
bhushan.kedar@crisil.com

Piyush Gupta
Associate Director, Funds & Fixed Income Research
piyush.gupta1@crisil.com

Prahlad Salian
Manager, Funds & Fixed Income Research
prahlad.salian@crisil.com

Kiran Nate
Manager, Funds & Fixed Income Research
kiran.nate@crisil.com

Venkatramh B
Manager, Funds & Fixed Income Research
venkatramh.b@crisil.com

Parth Pandya
Manager, Funds & Fixed Income Research
parth.pandya@crisil.com

Zunjar Sanzgiri
Senior Research Analyst, Funds & Fixed Income Research
zunjar.sanzgiri@crisil.com

For Feedback/Suggestions please write to: AMFI – contact@amfiindia.com /

2
CRISIL – mfresearch@crisil.com
Research

5 7
Message from AMFI Message from
CRISIL

9 14
Timelines Little SIPs help
rake in big bucks

22 30
Regulator and Fintech
industry come transforming

Contents
together to tide asset
over crisis management

38 46
Performance of Other industry
mutual funds trends
across categories

55
Annexure

3
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4
Research

Message from AMFI

Last year, the Indian mutual fund industry managed over Rs 25 trillion assets,
involving 20 million investors.

Retail participation continued to improve, too. Indeed, retail assets under

management have more than doubled since fiscal 2016.

Systematic investment plans (SIPs) account for a good chunk of the inflows, at
N. S. Venkatesh over Rs 8,000 crore a month today.
Chief Executive
Association of SIPs have done to the mutual fund industry what the sachets did to the FMCG
Mutual Funds in industry a few years back. SIPs as low as Rs 100 a month, technology-backed
India (AMFI) customer onboarding that happens in a matter of minutes, increased distribution
footprint through digital distributors, and simplified product nomenclature have
all helped investors select the category and build trust.

Yet, with just 11% of AUM-to-GDP ratio, acceptance and adoption of mutual
funds in India has a long way to go.

Efforts are being undertaken by the industry and the regulator, Securities and
Exchange Board of India (SEBI), to increase awareness of mutual funds and make
them a preferred investment option for long-term wealth creation.

‘Mutual Funds Sahi Hai’, an investor awareness media campaign launched by

AMFI under the guidance of SEBI in March 2017, has helped make mutual funds
a household name. Since the start of the campaign, the industry has added over
7 million new investors. Smaller cities and towns now contribute almost 15% of
the assets under management.

Digitalisation too is helping spread awareness. Indeed, 59% of all mutual fund
related queries on Google India are from non-metros. With information available
at fingertips, more and more first-time investors are searching for mutual funds
and investing in them online.

This fact book, compiled by AMFI and CRISIL jointly, puts out the key trends of
the industry. We are grateful to the CRISIL team for their help and support in
preparing this fact book.

5
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6
Research

Message from CRISIL

The domestic mutual fund industry appears to have emerged stronger after the
tumultuous phase it went through last year, given high volatility in the equity
market and the fallout of credit events in the debt market.

The biggest positive has been a surge in retail participation through the system-
atic investment plan (SIP) route, mainly in equity-oriented funds. Online search
trends also suggest heightened interest among individual investors to this effect.

Amish Mehta
To be sure, SIPs are an ideal route for individual investors to enter equity funds,
Chief Operating avoiding worries of timing the market, averaging cost, and investing in a disci-
Officer and plined manner. These investors should, however, note that the effectiveness of
President SIPs optimises over the long run, helping reduce risks from volatility in the un-
CRISIL Ltd. derlying market and shoring up returns.

SIP inflows augur well for the industry, too, as these instil a measure of predict-
ability from the fund manager’s point of view.

On the debt side, the industry and regulator have come together over the past
year to tide over the crisis that followed the credit events. Measures such as
side-pocketing, move towards full mark-to-market of debt securities and reduc-
tion of threshold caps for vulnerable pockets are a welcome change and aimed
at adopting best practices.

Meanwhile, financial technology has emerged as a harbinger of growth for asset

management companies, both in terms of customer acquisition and at the back-
end. The front-end needs sharper focus, though. Also, the benefits of technology
notwithstanding, there are overlapping risks such as consumer protection, data
protection, lack of infrastructure and access, which need to be managed by the
industry, especially in a developing country such as India.

CRISIL has been associated with the industry and capital markets over three de-
cades and our analytics and solutions such as CRISIL Mutual Fund Ranking and
benchmarks for debt market, widely sought as inputs for decision making. The
recently launched Quantix Investment Research platform provides asset manag-
ers with pre- and post-investment research.

We are honoured to partner with AMFI again for the third annual edition of the
industry fact book. I hope stakeholders will find the insights useful.

7
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8
Research

Timelines

9
 2017
l SEBI allowed mutual funds to
invest in REITs and InvITs
l Allowed investment up to Rs
50,000 per mutual fund per
financial year through digital
wallets
l Instant access facility to the
liquid funds investors (via
online mode) of up to Rs 50,000
or 90% of the folio value,
whichever is lower
l Government discontinued the
tax benefits of RGESS
l Changed the definition of
'long term' for debt mutual
funds to 36 months from 12
months for LTCG
l Tax exemption limit for
investment in financial
instruments under Section
80C raised to Rs 1.5 lakh
from Rs 1 lakh
2014
l Reduction in Securities
Transaction Tax (STT) for
equity funds
l Uniform Dividend Distribution
Tax (DDT) of 25% on all debt
mutual funds
l Product labelling
l Introduction of direct plans
10 2013
2018
l SEBI asked fund houses to
benchmark returns of equity schemes
against a total return index (TRI)
l SEBI introduced categorisation and
rationalisation of mutual fund
schemes making it simpler for
investor to understand
l LTCG of 10% without indexation
introduced for equity-oriented funds
for investment horizon of > 1 year,
subject to capital gains of over Rs 1
lakh per assessee per year. Dividend
plans of equity-oriented funds
subject to a DDT of 10%, deducted at
source
l Mutual fund houses asked to disclose
TER for all schemes under a separate
head on their websites on a daily
basis
l SEBI further redefined the scope for
T15/B15 cities to T30/B30 and push
for higher penetration
l Launch of MF Utility (MFU) - Digital aggregator
platform by the industry, for the industry
l SEBI asked fund houses to shift from colour
coding to Riskometer which classified schemes
based on the risk profile
l EPFO started investing in the equity market via
Exchange Traded fund (ETF)
l SEBI allowed gold ETFs to invest up to 20% of
their assets in the government’s Gold
Monetisation Scheme
2015
l Single plan structure for mutual
fund schemes
l Cash investment allowed in
mutual funds
l Fungibility of total expense ratio
(TER) allowed
l Portion of TER to be used for
investor education
l Entire exit load to be credited to Removal
of the
the scheme
entry load
l Launch of Rajiv Gandhi Equity
Savings Scheme (RGESS)
2012 2009
Research 2019

l Industry adopt the full trail model of
commission in all schemes without payment of
any upfront commission. Upfronting of trail
commission will be allowed only in case of
inflows through SIPs for new investors to the
industry (identified by PAN), up to 1% for
maximum of three years.
l AMFI website starts disclosing fund industry
scheme industry performance data on a daily
basis.
l Additional TER of 30 bps from B-30 cities
restricted to individual investors.
l TER slabs cut by 0.25% for both equity and
debt schemes; the uppermost slab is pegged at
2.25% for equity funds having an AUM of up to
Rs 500 crore, and 2% for other schemes. In the
highest AUM slab of above Rs 50,000 crore, the
TER for equity funds would be 1.05% of the
scheme's AUM and 0.80% for other schemes.
· SEBI allows side-pocketing if debt assets are
downgraded to below investment grade.
l SEBI puts in place a robust and stricter cybersecurity
framework for mutual funds and AMCs to guard against
breaches of data leak, directs AMCs to constitute a
technology committee to review the cyber security and
resilience framework of the mutual fund industry.
l Caps weightage of a single stock in sectoral and
thematic indices, and set norms for minimum stocks an
index needs to have in a bid to protect investors from
risks related to portfolio concentration in ETFs and
index funds.
l Industry threshold for amortisation of debt securities
changed to 30 days from 60 days, proposed to move to
full MTM by early next year.
l Proposed cap on sectoral limit of 25% has been brought
down to 20%. The additional exposure of 15% to HFCs
will be restructured as 10% to HFCs and 5% to
securitised debt.
l Prescribes minimum holding of 20% in cash, receivables
and government securities to improve liquidity of liquid
funds
l Prescribes mandatory investment in listed securities

l SEBI tightened norms for

mutual fund investment in
corporate bonds

l Allowed investment advisors

to use the infrastructure of
the stock exchanges for sale
and purchase of mutual fund
units

l Provided easy entry to the

foreign fund managers keen
to enter India

2016

Robust growth Emergence

and revised MF of private sector Entry of public
regulation from funds Franklin sector funds
SEBI in 1996, Templeton SBI Mutual
(erstwhile Fund was Launch of
entry of foreign
Kothari Pioneer) first one the maiden Formation
funds, several
was the first of followed by scheme of of the
mergers and
its kind Canbank UTI-Unit Unit Trust
acquisitions
Mutural Fund Scheme of India

11
1993-
2003 1993 1987 1964 1963
12
Research

Systematic
investment
plans

13
 Little SIPs help rake in big bucks
Systematic investment plans (SIPs), a term typically associated small or retail investors, has
emerged as a big wave in the Indian mutual fund industry.

Between April 2016 – when the Association of Mutual Funds in India (AMFI) started disclosing
monthly SIP contributions – and June 2019, the route has helped rake in a whopping ~ Rs 2.3
trillion. That is nearly 19% of the increase of ~Rs 11.9 trillion in assets under management
(AUM) of the industry.

The surge has come on scores of new retail investors joining the ranks, too, as reflected in
the almost 3x growth in the number of SIP accounts to 27.3 million from 10 million over this
period.

What’s more, SIPs in equity-oriented mutual funds surged despite frequent bouts of market
turbulence between April 2016 and June 2019, indicating the route helps investors sidestep
the behavioural weakness that emerges during volatile market phases.

SIP contributions surge despite market volatility

90 12,500

80

11,400
70

60
Monthly contribution (Rs bn)

10,300
Nifty 50

50

40
9,200
30

20
8,100

10

0 7,000
Feb-17

Feb-18

Feb-19
Jun-16
Aug-16

Jun-17
Aug-17

Jun-18
Aug-18

Jun-19
Oct-16

Oct-17

Oct-18
Dec-16

Dec-17

Dec-18
Apr-16

Apr-17

Apr-18

Apr-19

SIP monthly contribution Nifty 50 (RHS)

Source: AMFI, NSE

14
Research

Number of SIP accounts on a steady uptrend

30 12,500

25
No of SIP accounts (in mn)

11,500

20
10,500

Nifty 50
15
9,500
10

8,500
5

0 7,500
Feb-17

Feb-18

Feb-19
Jun-16
Aug-16

Jun-17
Aug-17

Jun-18
Aug-18

Jun-19
Oct-16

Oct-17

Oct-18
Dec-16

Dec-17

Dec-18
Apr-16

Apr-17

Apr-18

Apr-19
No of SIP accounts Nifty 50 (RHS)

Source: AMFI, NSE

Further, there is a progressive rise in the contribution by investors through SIPs, as seen in
the month-on-month and year-on-year (fiscal) rise in investments through the systematic
route. While investors pumped in a moderate ~ Rs 439 billion in fiscal 2017, the contribution
has more than doubled in fiscal 2019 to ~Rs 927 billion. Further, during the three months to
June 2019, nearly Rs 245 billion of money came in to the industry through SIPs.

Annual contribution on the rise, too

(Rs bn)

927
672 FY19
FY18

439
FY17

Source: AMFI

15
 Another interesting data point of note is the rising share of contribution from SIPs to the in-
dustry’s AUM from around 8% in August 2016 to 11% in March 2019, and to 12% in June 2019.

SIP AUM as a percentage of the total industry assets on the rise

3,000 12%

SIP AUM as % of total industry assets

2,500
11%
SIP AUM (Rs bn)

2,000
10%
1,500
9%
1,000

8%
500

0 7%
Feb-17

Feb-18

Feb-19
Aug-16

Jun-17

Aug-17

Jun-18

Aug-18

Jun-19
Oct-16

Oct-17

Oct-18
Dec-16

Dec-17

Dec-18
Apr-17

Apr-18

Apr-19
SIP AUM SIP AUM as % share of total industry assets (RHS)

Source: AMFI

The surge in SIP activity and inflows into equity-oriented mutual funds, coupled with the fund
flows into liquid/ money-market segments, helped the industry reach its record-high AUM of
nearly Rs 26 trillion at the end of May 2019, before closing off its high at Rs 24.25 trillion in
the first half of calendar 2019.

SIPs help overall industry assets surge

30,000

25,000

20,000
Rs bn

15,000

10,000

5,000

0
Jun-09

Jun-10

Jun-11

Jun-12

Jun-13

Jun-14

Jun-15

Jun-16

Jun-17

Jun-18

Jun-19
Dec-08

Dec-09

Dec-10

Dec-11

Dec-12

Dec-13

Dec-14

Dec-15

Dec-16

Dec-17

Dec-18

Month-end AUM
Source: AMFI

16
Research

However, the 6.1% rise in the mutual fund industry’s assets during the past year (up to June
2019) was the slowest in similar one-year periods since 2012, because of weak sentiment for
debt mutual funds amid debt downgrades and subsequent liquidity crisis (the events that
impacted debt mutual funds last year, along with the ensuing moderation by the regulator
and the industry, would be taken up separately in this booklet).

Systematic investing can bear sweeter fruits over time

SIPs are long-term products and are very useful in wealth creation and risk reduction over a
longer investing horizon. An analysis by CRISIL shows that the risk of getting negative returns
reduces over longer investing horizons.

An analysis of CRISIL-AMFI Equity Fund Performance Index1 over the past 15 years to June
2019 showed that the instances of negative returns declined as the investment horizon in-
creased. The difference between the minimum and maximum SIP returns also narrowed with
the increase in the investment horizon.

Instances of negative returns decreased with increase in SIP tenure

30%
25%
25%
Instances of negative returns

20%
17%

15%

10% 8%
5%
5%

0% 0% 0% 0% 0% 0%
0%
1 year 2 years 3 years 4 years 5 years 6 years 7 years 8 years 9 years 10 years
SIP tenure

Source: CRISIL Research

1
Please refer to annexure for detailed definition of CRISIL-AMFI Equity Fund Performance Index

17
 120%
Maximum return
100%
80%
60%
40%
Reduced difference
20% between min and
Returns

max return
0%
-20%
-40%
-60%
Minimum return
-80%
1 year 2 years 3 years 4 years 5 years 6 years 7 years 8 years 9 years 10 years
SIP tenure
Source: CRISIL Research

Further, investing through SIP for longer tenures can significantly increase the amount of
wealth creation. An analysis of various equity categories shows that returns, and the sub-
sequent wealth creation, for investors improve, in line with the increase in the investment
horizon. Finance theory calls this the compounding effect, which says that longer periods of
time allow your money to multiply.

Probability of wealth augmenting increases with the rise in SIP investment periods

1,400
Invested
1,200 amount

1,000
800
Rs '000

600
400
200
0
Value and Contra

Small Cap Funds

Focused Funds
Large Cap Funds

Multi Cap Funds

Midcap Funds

Large and Mid Cap

Total Amount
Invested(Rs.)

Funds

Funds

3-Year SIP 5-Year SIP 7-Year SIP 10-Year SIP

Source: CRISIL Research

Monthly SIP contribution of Rs 5,000 has been assumed

Fund categories are represented by respective CRISIL-AMFI Fund Performance indices
Please refer to annexure for detailed definition of CRISIL-AMFI Fund Performance Indices

18
Research

Top-up SIPs

Investors can benefit more by topping up their investments on a regular basis.

A comparison between a regular SIP and a top-up SIP – assuming a monthly investment of
Rs 5,000 in CRISIL-AMFI Equity Fund Performance Index for 15 years to June 2019 shows that
a top-up SIP (with a 5% increase in contribution every year) yields Rs 3.3 million, compared
with Rs 2.6 million for a regular SIP. Top-up SIPs allow investors to increase their SIP contri-
bution periodically, in sync with their rising incomes.

Top-up SIPs aid higher wealth creation, while being in sync with the rise in individual incomes

4,000 Rs 3.3 mn
Value of investments (Rs '000)

3,500

3,000

2,500

2,000
Rs 2.6 mn
1,500

1,000

500

0
Jun-04

Jun-05

Jun-06

Jun-07

Jun-08

Jun-09

Jun-10

Jun-11

Jun-12

Jun-13

Jun-14

Jun-15

Jun-16

Jun-17

Jun-18

Jun-19
Dec-04

Dec-05

Dec-06

Dec-07

Dec-08

Dec-09

Dec-10

Dec-11

Dec-12

Dec-13

Dec-14

Dec-15

Dec-16

Dec-17

Dec-18
Regular SIP Top-up SIP
Source: CRISIL Research

Summing up

The growing size of SIPs and the number of SIP investors showcase the mutual fund industry’s
efforts to inculcate the habit of disciplined investing.

The mutual fund industry has been working hard to spread financial literacy, financial
freedom and the better aspects of behavioural investing among retail investors. The growing
asset base from systematic investments is a win-win for both investors and the industry, as it
improves the scale of players and provides wealth-creation opportunity for investors across
risk profiles and investment horizons.

19
 Google trend analytics

SIP run-up steady even as searches come off

85 85

SIP monthly contribution (Rs bn)

80
83
75
Google trends

70 81

65 79
60
77
55

50 75
Sep-18

May-19
Oct-18

Nov-18

Dec-18

Jan-19

Feb-19

Mar-19

Apr-19

Jun-19

Jul-19
SIP monthly contribution (RHS) #SIP searches

Growth trajectory continues despite fewer searches

85 26000

80

Mutual fund AUM (Rs bn)

25000
75
Google trends

70
24000
65

60
23000
55

50 22000
Sep-18

Oct-18

Nov-18

Dec-18

Jan-19

Feb-19

Mar-19

Apr-19

May-19

Jun-19

Jul-19

Mutual Fund AUM (RHS) #Mutualfund searches

Note – Search queries denotes the most popular search queries for the trend. Scoring is on a relative scale where a value of 100 is the
most commonly searched query, 50 is a query searched half as often as the most popular query, and so on.

Source: Google, AMFI

20
Research

Debt funds

21
 Regulator and industry come together to
tide over crisis

Debt mutual funds went through a tumulus phase last year, hit by credit worries and the
ensuing liquidity crisis, even as assets under management of the mutual fund industry kept
swelling. In fact, the liquidity concerns, coupled with quarterly advance tax requirements of
corporates, resulted in a record outflow of Rs 2.11 trillion from the liquid funds category in
September 2018.

September 2018 saw the highest ever outflow from liquid funds

7,000 2,000

1,500
6,000

Inflow / outflow from liquid funds in Rs bn

1,000
Aset growth of liquid funds in Rs bn

5,000
500

4,000 0

3,000 -500

-1,000
2,000
-1,500

1,000 Highest outflow

-2,000
on record from
liquid funds - Sep
0 -2,500
Jan-11

Jan-14

Jan-17
Mar-09

Jun-10

Aug-11

Jun-13

Jun-16

Jun-19
Apr-12

Apr-15

Apr-18
Nov-09

Nov-12

Nov-15

Nov-18
Sep-14

Sep-17

Inflow outflows Liquid fund asset growth (LHS)

Source: AMFI

The situation prompted SEBI and the industry to swing into action. In order to avert such
events in future, a working group comprising representatives of AMCs, the industry and
academia was constituted. The recommendations of the group were taken as input by the
Mutual Fund Advisory Committee.

22
Research

Key measures announced post liquidity crisis

• To start with, the regulator targeted credit events and its impact on debt mutual fund
investors, especially in the wake of haircuts taken by affected schemes. It allowed debt
schemes to create ‘side pockets’, which would allow fund managers to segregate their
stressed investments from the rest of the portfolio.

What are side pockets?

Segregated portfolios, or ‘side pockets’ as these are popularly called, allow a fund
manager to isolate the affected portion of the portfolio impacted by credit default,
to ring fence the assets. This ensures good investments are not impacted.

The side-pocketed portfolio could then be divided between investors based on

their investment in the original scheme. Further, the fund manager could pursue
negotiations with the affected issuer to recover the monies. Thus, side pockets free
up money for regular fund management in the original scheme without choking
money flow for investors and investment management.

To avoid misuse of the feature by fund houses, the regulator has said that
trustees of all fund houses will have to put in place a framework to disincentivize
indiscriminate use of this facility.

Further, SEBI has said that side pockets must not be looked upon as a sign of
encouraging undue credit risks, as any misuse of the option would be considered
serious, attracting stringent action.

• To reduce the impact of the liquidity crisis in the mutual fund industry, the regulator
reduced the threshold for amortisation to 30-day maturity from June 22, 2019. In addition
to the reduction in threshold, it has modified the amortisation rule to 0.025% of the
reference, compared with 0.10% earlier, to bring the reset price closer to the market price.

Further, SEBI has now proposed full mark to market (MTM). This means, in future, all debt
securities would have to be valued at their market price.

The change to the reduced threshold and the future plans to full MTM is a best practice
not followed even in developed markets such as the US, where the amortisation rule for
money market fund restricts the weighted average maturity of the fund from exceeding 60
days since 2010, albeit down from 91 days earlier.

23
 • Further, the regulator has brought in symmetry in terms of the haircuts taken by AMCs
in case of credit events. As per the new regulation, AMCs must value the below-invest-
ment-grade securities at the price provided by valuation agencies. Until such time prices
are not made available, they must be valued on the basis of indicative haircuts provided
by the agencies. This follows a similar principle to that of the SEBI circular about creation
of segregated portfolios in case of a credit event to ensure existing investors are insulated
from new investors coming in after the event.

• Other changes effected by SEBI to de-risk debt mutual funds include:

1) Reducing sectoral limits to housing finance companies (HFCs)

In the lead up to the eventual defaults since the start of fiscal 2019, there were specific
concerns related to liquidity in non-banking finance companies (NBFCs) and HFCs.

Mutual funds are major lenders to NBFCs as they subscribe to a significant portion of
their commercial paper issuances. Conversely, the NBFC sector constitutes one of the top
sectoral exposures in debt mutual funds.

Given the growing concentration risks that have come to the fore over the past year, the
regulator has proposed changes in issuer and sectoral limits to HFCs in a bid to de-risk the
portfolio. The cap on sectoral limit of 25% has been brought down to 20%. The additional
exposure of 15% to HFCs will be restructured as 10% to HFCs and 5% to securitised debt,
based on retail housing loan and affordable housing loan portfolios.

While the new regulations are aimed at reducing pitfalls from concentrated sectoral
portfolios especially in vulnerable pockets, an analysis of the mutual fund industry shows
that fund managers have noticeably moved away from the trend of sectoral allocation
since the pre-crisis period.

Average sectoral exposures to vulnerable sectors have dipped

HFC % exposure Jun-18 Jun-19 NBFC % exposure Jun-18 Jun-19

(Liquid funds) (Liquid funds)

Average 14.64 6.66 Average 20.28 15.22

Median 14.84 6.00 Median 20.13 15.07
Number of funds
Number of funds >10% 29 7 >20% 17 10

Source: CRISIL Research

24
Research

2) Improving liquidity, reducing credit risk of liquid funds

The regulator has proposed that liquid funds must hold at least 20% of their assets as
cash, government securities (G-secs), treasury bills, or repo on G-secs, which are all
considered to be highly liquid instruments.

This is aimed at providing sufficient cushion to the funds in times of heavy redemption
pressure. In case of a deficit, any additional investments must go towards meeting the
above requirement before investing in other assets.

Further, liquid funds are not to invest in any structured obligations (SO), also now
known as credit enhancements (CE). SOs are a source of higher returns for a fund,
albeit at a high credit and liquidity risk. For other debt mutual funds, too, the exposure
to SO/CE papers is to be capped at 10%, with 5% cap at a single group level. Moreover,
for CE papers where equity shares have been pledged, SEBI has recommended a min-
imum coverage of over four times.

Analysis of data shows that most liquid funds are already conforming to the mandate
in cash and G-secs, and reducing their SO-rated exposure gradually.

Cash/G-secs exposures (Liquid funds)

% exposure Jun-18 Jun-19

Average 11.36 19.11

Median 7.92 12.29
Number of funds <20% 33 25

SO-rated exposure (Liquid funds)

% exposure Jun-18 Jun-19

Max 3.15 2.34

Average 0.82 0.42
Number of funds >0% 12 8
Source: CRISIL research

25
 3) Prescribing exit load
To reduce liquidity issues, a graded exit load is to be levied on investors of liquid
schemes who exit the scheme within a period of seven days. This brings in stability of
cash flow for the category, aiding better investment positioning for the fund manager.

4) Mandatory investments in only listed debt securities

This would bring in additional transparency as complete details of the security as well
as financials, profit and loss, and annual reports of issuer would be available in the
public domain on a periodic basis, helping monitor risks more efficiently.

5) Fund houses to develop early warning signals

SEBI has indicated to mutual fund houses that an early warning mechanism must be
put in place. This would bring in better monitoring by fund managers, enabling them to
take appropriate actions and precautionary measures before credit risks materialise.

Summing up

The sweeping measures taken and proposed by the regulator are expected to put in place
best practices in the industry. Investors must, however, note that debt mutual funds, like
other mutual fund categories, are exposed to market risk. Hence, they must invest based on
their risk-return profile and investment horizon.

The industry, on its part, must diligently follow the measures and aim to improve risk practices
to avoid a contagion. Educating investors about various products and their risk-return profiles
would also do a world of good for picking the right product match from the basket.

26
Research

Google trend analytics

Search for debt mutual funds spiked during credit events

Spike in google searches seen during credit

events
75 13,500

70
13,000

65
12,500

Debt mutual funds AUM (Rs bn)

60

12,000
Google trends

55

11,500

50

11,000

10,500
45

40 10,000
Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19 Jul-19

#Debtmutual fund searches Debt mutual fund AUM (RHS)

Note – Search queries denotes the most popular search queries for the trend. Scoring is on a relative scale where a value of 100
is the most commonly searched query, 50 is a query searched half as often as the most popular query, and so on.

Source: Google, AMFI

27
28
Research

Fintech

29
 Fintech transforming asset management
Financial technology, or fintech, has played a key role in rapid development of global financial
markets in recent years, having evolved to plug gaps such as speed, cost, transparency, ac-
cess and security in delivery of financial services.

In the asset management space, fintech has the opportunity to address the needs of custom-
ers, both internal (investment management) and external (clients).

Technology an ally for both internal and external customers of AMCs

Compliance
Portfolio
Back office Front desk
management Service
Acquisition

Trade
Risk execution Order
management management

Source: Inputs taken from BlackRock viewpoint – The role of technology within asset management

Role of technology in managing investments

Technology enables an asset manager to considerably improve the investment process while
reducing the associated risks.

For instance, automating the investment process will boost a fund manager’s efficacy in
terms of time and portfolio management, aiding the overall investing strategy of the fund
house. End-to-end management of investments can be completely automated, with decisions
driven by aggregated data, algorithms and risk models, reducing subjectivity in investment
decisions.

Technology can also play an important role in risk and compliance management with the use
of automated checks and balances, and risk models. This is especially important today, given
the rapid changes in risk controls enforced by the regulator to factor in changes in the market.

Thus, a cohesive technological platform that can improve the investment process, introduce

30
Research

effective risk controls, and maintain an audit trail of transactions can be a boon to the asset
management process.

With improved risk management and the aggregation of objective performance data, fund
managers can make smarter decisions.

New techniques and developments in this field include the usage of artificial intelligence
(AI), machine learning (ML) and robotic process automation (RPA). Meanwhile, the use of
distributed ledger technology and blockchain is being explored to simultaneously provide
access to data to all parties involved, improving overall efficiency.

For investors, this digital transformation of the back office of asset management companies
can bring benefits such as transparency, better risk management and deeper disclosure of
data, a win-win for both the industry and the investor.

Role of technology in managing clients

Driven by fintech solutions, client management offers great potential for development.

In India, most investors still invest in traditional instruments via the brick-and-mortar route.
Investor penetration in mutual funds remains low. Fintech in the client management space
can boost penetration, convert a large proportion of the current investment base into recurring
investments, and improve the overall customer experience of investing in the mutual funds
industry.

Some of the tools used by the industry to digitally enhance the customer investment process
are usage of online platforms, in-house captive mobile applications, robo-advisory platforms
and possibly e-commerce platforms in future. These applications and platforms enable
paperless and intuitive investor transactions, for greater industry ease of access.

Further, the use of asset allocation and algorithms to move from subjective investment
decisions to objective goal-based investments is also a positive move towards financial
planning, compared with the traditional goalless savings approach.

In addition, mining of customer data has been garnering a lot of traction within the asset
management and financial planning space.

Data is king, and big data analytics allows mutual funds to statistically analyse the actions
of investors through tools such as predictive analytics on customer data analysis, in order to
better understand customer behaviour and improve sales.

Data analytics can be used as a resource for customer management and to aid the sales
process by offering specific intelligence to field agents, including the distributor community.
This data provides an insight into customer preferences, enabling the players to offer bespoke
products, tailored to suit specific customer preferences, without the need to manually sift
through customer interactions.

31
 Technology-adoption paying dividends

Adoption of technology in the digital payments sphere has aided the rapid influx of digital
money into the industry. The share of digital gross inflows grew from ~0.5% three years
ago to nearly 1/7th of gross flows by end-fiscal 2019, given the growing smartphone and
internet penetration in the hinterland. Inflows through the physical route have been gradually
declining.

Digital payments continue to surge

20,000 16%

14%

15,000 12%
Gross inflows (Rs bn)

10%

10,000 8%

6%

5,000 4%

2%

0 0%
Feb-17

Feb-18

Feb-19
Jun-16
Aug-16

Jun-17
Aug-17

Jun-18
Aug-18

Jun-19
Oct-16

Oct-17

Oct-18
Dec-16

Dec-17

Dec-18
Apr-16

Apr-17

Apr-18

Apr-19

Gross flows through digital mode Gross flows through Physical mode
% share of overall flows (RHS)

Source: AMFI

In terms of geographic penetration, the industry moved from categorisation of regions from
Top 15 (T15) and beyond 15 (B15) to T30 and B30 cities, in line with the increasing penetration
of the industry within the country.

Thus, the long-term trend analysis of the penetration is not comparable. However, as seen in
previous years, there is an increasing trend in assimilation of the mutual fund industry in the
hinterland even as higher adoption remains prevalent in T30 cities.

32
Research

Rise in geographic penetration even as top cities contribute the most flows

1,400 70

1,200 60

1,000 50
Gross flows (Rs bn)

Gross flows (Rs bn)

800 40

600 30

400 20

200 10

0 0
Jan-17

Jan-18
Feb-17

Feb-18
Mar-17

Mar-18
Jun-16

Aug-16

Jun-17

Aug-17
Oct-16

Oct-17
Dec-16

Dec-17
Apr-16

Apr-17
May-16

May-17
Nov-16

Nov-17
Sep-16

Sep-17
Jul-16

Jul-17

Gross digital flows from T15 cities Gross digital flows from B15 cities (RHS)

3,000 120

2,500 100

2,000 80
Gross flows (Rs bn)
Gross flows (Rs bn)

1,500 60

1,000 40

500 20

0 0
Jan-19

Feb-19

Mar-19
Jun-18

Aug-18

Jun-19
Oct-18

Dec-18
Apr-18

Apr-19
May-18

May-19
Nov-18
Sep-18
Jul-18

Gross digital flows from T30 cities Gross digital flows from B30 cities

Source: AMFI

Within the investor segment, individual investors lead in terms of AUM contribution (as de-
tailed in the annexure chapters), while institutional investors continue to lead in terms of
digital money flowing into the industry.

33
 Institutional investors continue to garner a lion’s share of digital transactions

3,000 120

2,500 100

2,000 80

Gross flows (Rs bn)

Gross flows (Rs bn)

1,500 60

1,000 40

500 20

0 0
Feb-17

Feb-18

Feb-19
Jun-16
Aug-16

Jun-17
Aug-17

Jun-18
Aug-18

Jun-19
Oct-16

Oct-17

Oct-18
Dec-16

Dec-17

Dec-18
Apr-16

Apr-17

Apr-18

Apr-19
Gross digital flows from Institutional investors
Gross digital flows from Individual investors (RHS)

Source: AMFI

Among the factors driving these changes in geography and investor segment are the growing
availability of information, and awareness and penetration of the industry across geographies/
investor segments. Given the pace of development in the digital space, the laggards are
expected to catch up in years to come.

The government has also played a significant role in digitisation through its extensive efforts
at financial inclusion, spreading financial awareness to the remotest parts of the country
and bridging the geographical divide. The recent proposal by the government and the Reserve
Bank of India (RBI) to use Aadhaar for KYC will ease digital transactions.

Further, the government and the regulators have also taken several initiatives to boost
the fintech ecosystem and provide startups with new opportunities to launch competitive
products.

Clearly, the role of technology can only grow, and the digital mode is the way forward for the
industry, intermediaries and investors. Adoption will be a win-win for all – helping boost
industry penetration while providing it with an effective medium to improve efficiency and
reduce costs, the benefits of which can be passed on to investors.

But risks need to be managed

Notwithstanding the benefits of technology, there are overlapping risks that need to be
managed by the mutual fund industry, especially in a developing country such as India. Some
major factors that need to be considered in this respect are detailed below.

34
Research

What are the risks?

Consumer Transparency and electronic disclosure; product

protection suitability and over-indebtedness; agent liability; data
privacy; effective recourse mechanisms; safety of funds;
cybersecurity, and digital illiteracy.

Data
protection Compromise of privacy, identity theft and harm where
consumers have low levels of financial and digital
capability

Discrimination
Biases inhibited with biases from underlying data,
the people designing them and existing preferences
prevalent in the industry

Exclusion
Unequal access, lack of infrastructure that permits
enhanced analytics, lack of access to financial illiterate

Source: IMF policy paper – Fintech: The experience so far, June 2019

There are risks associated with both front and back office operations.

At the front end, it is important to ensure customer data integrity for both prospective and
current clients. This is especially important for first-time customers who are yet to get com-
fortable with digital platforms.

At the back end, a systemic process that does not take into account changing market dynam-
ics and displays a bias for a particular investment design or prevalent workflow could reduce
the benefits of technology adoption.

Thus, it is important that the mutual funds industry adopt fintech while taking cognisance of
the risks involved, and upgrade technologies as and when advancements are available.

35
36
Research

Performance

37
 Performance of mutual funds across
categories
As an investment vehicle, mutual funds have the potential to give good returns and create
wealth for investors in the long term. This makes them an important piece of the wealth man-
agement jigsaw.

A look at the CRISIL-AMFI Equity Fund Performance Index shows equity funds have on aggre-
gate underperformed the broad equity markets in the past one year.

However, this is not a fair comparison. To reiterate, mutual funds are a long-term investment
avenue, and hence, their performance is best analysed over the long term.

A back-of-the-envelope calculation shows that Rs 1,000 invested in this index would have
grown more than 30 times to Rs 30,735 in 20 years through June 30, 2019, while a similar
investment in S&P BSE Sensex or Nifty 50 would have grown to slightly more than 13 times.

Growth of Rs 1,000 in equity mutual funds versus benchmarks

40,000

30,000

20,000

10,000

0
Jun-99

Jun-00

Jun-01

Jun-02

Jun-03

Jun-04

Jun-05

Jun-06

Jun-07

Jun-08

Jun-09

Jun-10

Jun-11

Jun-12

Jun-13

Jun-14

Jun-15

Jun-16

Jun-17

Jun-18

Jun-19

CRISIL – AMFI Equity Fund Performance Index Nifty 50 Nifty 500 S&P BSE SENSEX

Category/Index CRISIL-AMFI Equity Fund S&P BSE Nifty 50 Nifty 500

Performance Index Sensex

Growth of Rs 1,000
since June 30, 1999 30,735 13,129 13,080 16,348

Source: CRISIL Research, BSE, NSE

CRISIL-AMFI Fund Performance indices are weighted average indices of funds ranked under respective categories in CRISIL Mutual
Fund Ranking
Please refer to annexure for detailed definition of CRISIL-AMFI Fund Performance Indices
Data as on June 28, 2019
Total returns index has been considered for S&P BSE Sensex, Nifty 50 and Nifty 500
Data since inception of Nifty 50 Total Returns Index, i.e., June 30, 1999

38
Research

A comparison of the rolling returns of CRISIL-AMFI fund performance indices with their re-
spective benchmarks across categories and intervals, over 15 years or since inception of the
indices, whichever is longer, shows the fund indices have outperformed their benchmarks in
all the periods analysed.

Category Average rolling returns

3 years 5 years 7 years 10 years

CRISIL–AMFI Large Cap Fund 13.85% 13.32% 12.41% 13.26%
Performance Index
S&P BSE Sensex 13.40% 12.64% 11.81% 12.56%
Nifty 50 13.27% 12.50% 11.66% 12.43%

CRISIL–AMFI Large and Midcap Fund 15.17% 15.13% 14.03% 15.06%

Performance Index
Nifty 500 13.40% 12.69% 11.63% 12.60%

CRISIL–AMFI Multi Cap Fund 14.86% 14.23% 13.06% 14.14%

Performance Index
Nifty 500 13.40% 12.69% 11.63% 12.60%

CRISIL–AMFI Midcap Fund Performance 15.74% 16.29% 15.18% 16.03%

Index
Nifty Midcap 100 15.28% 15.02% 13.43% 14.88%

CRISIL–AMFI Smallcap Fund 23.63% 25.88% 21.25% NA

Performance Index
Nifty Smallcap 100 13.16% 14.48% 11.97% NA
S&P BSE Smallcap 13.49% 15.18% 11.77% NA

CRISIL–AMFI ELSS Fund Performance 14.80% 14.44% 13.39% 14.35%

Index
Nifty 500 13.40% 12.69% 11.63% 12.60%

CRISIL–AMFI Focused Fund 14.20% 13.67% 12.69% 13.58%

Performance Index
Nifty 500 12.73% 12.37% 11.37% 12.28%

CRISIL–AMFI Value and Contra Fund 14.30% 13.81% 12.62% 13.67%

Performance Index
Nifty 500 13.40% 12.69% 11.63% 12.60%

Source: CRISIL Research, BSE, NSE

CRISIL-AMFI Fund Performance indices are weighted average indices of funds ranked under respective categories in CRISIL Mutual
Fund Ranking
Please refer to annexure for detailed definition of CRISIL-AMFI Fund Performance Indices
Total returns index has been considered for S&P BSE Sensex, Nifty 50, Nifty 500, Nifty Midcap 100, S&P BSE Smallcap, Nifty Smallcap

39
100
Data as on June 28, 2019
Annualised return
 Hybrid

Hybrid funds are mutual funds that invest in both equity and debt securities. Some hybrid
funds also invest in other asset classes such as gold, which helps in portfolio diversification.

Growth of Rs 1,000 in hybrid mutual funds versus benchmarks

16,000

14,000

12,000

10,000

8,000

6,000

4,000

2,000

0
Mar-02

Jun-16

Jun-17

Jun-18

Jun-19
Apr-03

Apr-04

Apr-05

Apr-06

Apr-07

Apr-08

Apr-09

May-10

May-11

May-12

May-13

May-14

May-15
CRISIL – AMFI Aggressive Hybrid Fund Performance Index
CRISIL – AMFI Conservative Hybrid Fund Performance Index
CRISIL Hybrid 35+65 - Aggressive Index
CRISIL Hybrid 85+15 - Conservative Index

Category/Index CRISIL–AMFI CRISIL Hybrid CRISIL–AMFI CRISIL Hybrid

Aggressive 35+65 - Conservative 85+15 -
Hybrid Fund Aggressive Hybrid Fund Conservative
Performance Index Performance Index
Index Index
Growth of Rs 1,000
since March 31, 2002 14,541 9,597 4,622 4,327
Source: CRISIL Research, BSE, NSE

CRISIL-AMFI Fund Performance indices are weighted average indices of funds ranked under respective categories in CRISIL Mutual
Fund Ranking
Please refer to annexure for detailed definition of CRISIL-AMFI Fund Performance Indices
Data as on June 28, 2019
Total returns index has been considered for S&P BSE Sensex, Nifty 50 and Nifty 500
Data since inception of Nifty 50 Total Returns Index, i.e., June 30, 1999

40
Research

Debt

Debt funds are an attractive choice over bank fixed deposits as they provide the benefit of
indexation for a holding period of more than three years. An analysis of investment in three
indices – CRISIL-AMFI Medium Duration Fund Performance Index, CRISIL-AMFI Medium to
Long Duration Fund Performance Index and CRISIL–AMFI Gilt Fund Performance Index –
compared with that in a three-year bank fixed deposit over 15 years through June 2019 shows
the fund indices have given superior returns on a post-tax basis.

Category 15-year returns pre-tax 15-year returns post-tax

CRISIL-AMFI Medium Duration
Fund Performance Index 7.29% 7.08%
CRISIL-AMFI Medium to Long
Duration Fund Performance Index 7.39% 7.14%
CRISIL–AMFI Gilt Fund Performance
Index 7.09% 6.83%
3-year FD
7.20% 5.14%

Source: CRISIL Research

CRISIL-AMFI Fund Performance indices are weighted average indices of funds ranked under respective categories in CRISIL Mutual
Fund Ranking
Please refer to annexure for detailed definition of CRISIL-AMFI Fund Performance Indices
Growth in Cost Inflation Index for FY20 has been assumed to be the same as in the previous year
Returns from 3-year fixed deposit have been calculated by considering the simple average of FD rates of top three (by total deposits)
public and private sector banks on a continuous basis for buckets of three years for the last 15 years
Highest tax bracket of 30% is assumed

An investment of Rs 1,000 in CRISIL Debt Fund Performance Index on March 31, 2002, would
have grown to Rs 3,530, whereas the same amount invested in CRISIL Composite Bond Fund
Index for the same period would have grown to Rs 3,351.

41
 Growth of Rs 1,000 in debt mutual funds versus benchmarks

4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
0
Mar-02

Jun-15

Jun-16

Jun-17

Jun-18

Jun-19
Apr-03

Apr-04

Apr-05

Apr-06

Apr-07

Apr-08

May-09

May-10

May-11

May-12

May-13

May-14
CRISIL AMFI Debt Fund Performance Index CRISIL Composite Bond Fund Index

Category CRISIL AMFI Debt Fund CRISIL Composite Bond

Performance Index Fund Index
Growth of Rs 1000
since March 31, 2002 3,530 3,351

Source: CRISIL Research

CRISIL-AMFI Fund Performance indices are weighted average indices of funds ranked under respective categories in CRISIL Mutual
Fund Ranking
Please refer to annexure for detailed definition of CRISIL-AMFI Fund Performance Indices
Data as on June 28, 2019
Data since inception of CRISIL Composite Bond Fund Index, i.e., March 31, 2002

Growth of Rs 1,000 in short term debt mutual funds versus benchmarks

4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
0
Jan-03

Jan-10

Feb-17
Mar-06

Mar-13
Aug-04

Aug-11
Jun-12

Jun-19
Oct-03

Oct-14
Dec-06

Dec-13
Apr-02

Apr-09
May-05

May-16
Nov-10

Nov-17
Sep-07

Sep-18
Jul-08

Jul-15

CRISIL – AMFI Short Duration Fund Performance Index CRISIL Short Term Bond Fund Index

42
Research

Category/Index CRISIL-AMFI Short CRISIL Short Term Bond

Duration Fund Fund Index
Performance Index
Growth of Rs 1,000
since April 01, 2002 3,503 3,350

Source: CRISIL Research

CRISIL-AMFI Fund Performance indices are weighted average indices of funds ranked under respective categories in CRISIL Mutual
Fund Ranking
Please refer to annexure for detailed definition of CRISIL-AMFI Fund Performance indices
Data as on June 28, 2019

Market phase analysis – CRISIL-AMFI debt fund performance indices

Flat or high interest rate period Recentincrease

Recent increasein
Secular decline in Sharp correction in Flat or high interest rate period of Declining yields inyields
yields
of
11.00% yields in 2000-04 yields in 2008^ 2008-14 2014-2016 2016-present
2004-08 2016-present

Phase Cumulative Phase C umulative

10.00%
11.34% 11.34% 4.16% 6.87%
16.40% 16.40% 3.25% 8.13%
- - 6.42% 6.65%
9.00%
10 year g-sec yield movement

7.32% 7.32% 6.01% 6.51%

8.00%

7.00%

6.00% Phase Cumulative Phase Cumulative Phase Cumulative Phase Cumulative

19.51% 9.08% 5.71% 7.59% 13.78% 8.45% 3.94% 7.78%

5.00%
25.71% 11.06% 3.48% 7.67% 15.50% 8.75% 4.88% 8.18%
5.13% 7.01% 7.90% 7.42% 10.21% 7.83% 5.88% 7.54%
3.30% 6.60% 9.75% 7.97% 8.47% 8.04% 7.01% 7.89%
4.00%
2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2018

2019

10 Year G-sec yield

A Medium to Long duration funds B Gilt funds C Short duration funds D Bank FD

Source: CRISIL Research

Medium to long duration, gilt and short duration funds represented by CRISIL-AMFI Medium to Long Duration Fund Performance
Index, CRISIL-AMFI Gilt Fund Performance Index and CRISIL-AMFI Short Duration Fund Performance Index, respectively
CRISIL-AMFI Short Duration Fund Performance Index is available from April 2002 (inception)
Banks’ effective FD rates represented by three- and one-year FD rates; for period less than a year, one-year FD rate has been
considered
Returns for market phase of more than one year are annualised
Cumulative returns means returns since September 01, 2001
^ Absolute returns
CRISIL-AMFI Fund Performance indices are weighted average indices of funds ranked under respective categories in CRISIL Mutual
Fund Ranking
Please refer to annexure for detailed definition of CRISIL-AMFI Fund Performance indices
Data as on June 28, 2019

43
 Funds with very short maturity

Funds with maturity of less than one year, too, have outperformed traditional savings bank
accounts, showing these can be a viable alternative for smaller investment horizons.

Category/Index 3 months 6 months 1 year 3 years 5 years

CRISIL–AMFI Liquid Fund
Performance Index 1.76% 3.55% 7.43% 7.05% 7.59%
CRISIL–AMFI Ultra Short
Duration Fund Performance 1.55% 3.78% 7.82% 7.47% 7.92%
Index
CRISIL–AMFI Low Duration
Fund Performance Index 0.63% 2.85% 6.94% 7.14% 7.73%
CRISIL–AMFI Money Market
Fund Performance Index 1.83% 3.96% 7.81% 7.29% 7.76%
Savings Bank Rate Index
0.87% 1.70% 3.49% 3.69% 3.81%
Source: CRISIL Research

CRISIL-AMFI Fund Performance indices are weighted average indices of funds ranked under respective categories in CRISIL Mutual
Fund Ranking
Savings Bank Rate Index has been constructed using the average savings rate of top three (by total deposits) public and private sector
banks
Please refer to annexure for detailed definition of CRISIL-AMFI Fund Performance indices and Savings Bank Rate Index
Data as on June 28, 2019
Returns for period more than one year are annualised

44
Research

Other
industry
trends

45
 Other industry trends
Surge in equity fund assets takes their share to 45% of AUM as of June 2019

The mutual fund industry’s stellar growth has come on the back of a surge in equity-oriented
funds, which saw their assets under management (AUM) log a whopping 38.6% compound
annual growth rate (CAGR) between March 2014 and June 2019.

The surge took the equity-oriented mutual funds’ share of industry assets to 45% as of June
2019, up sharply from 24% as of March 2014.

It also benefitted hybrid funds – especially aggressive hybrid funds (erstwhile balanced
funds), which invest more than 65% in equities – whose AUM grew at ~51% CAGR during
the period analysed. This compares with ~23% growth for the industry and 8% and 27%,
respectively, for debt and liquid money market segments.

Equity AUM on steady uptrend

30,000 50%
45%

Share of equity oriented funds

43%
45%
25,000 38% 39%
40%
35%
32% 33% 31% 33% 33% 34% 35%
20,000
AUM (Rs bn)

26% 30%
25% 24%
15,000 25%
20%
10,000
15%
10%
5,000
5%
0 0%
Mar-07

Mar-08

Mar-09

Mar-10

Mar-11

Mar-12

Mar-13

Mar-14

Mar-15

Mar-16

Mar-17

Mar-18

Mar-19

Jun-19

Equity Aggressive hybrid (Balanced) Debt

Liquid / Money market Others Share of equity oriented funds

Source: AMFI

Based on month-end AUM

Categories as per June 2019 monthly AUM report have been mapped with old categories in order to maintain comparability with
historical AUM
Equity includes other ETFs, arbitrage, balanced advantage, equity savings categories
Debt includes conservative hybrid funds
Others include solution oriented funds (wherever split available), gold ETFs, fund of funds - investing overseas

46
Research

Equity-oriented funds have seen net inflow of ~Rs 6.3 trillion since fiscal
2015

The surge in assets owes itself to robust inflows, given higher participation by individual in-
vestors, especially through the SIP route, and also a rising equity market (Nifty 50 TRI re-
turned 12.8% CAGR between March 2014 and June 2019).

Beginning fiscal 2015, the Indian mutual fund industry witnessed sturdy inflows of Rs 9.8
trillion till the first quarter of fiscal 2020. Equity-oriented funds accounted for 64% of the net
inflows, while balanced funds garnered 16%.

In the fixed-income space, debt funds witnessed net inflows from fiscal 2015 to 2017. How-
ever, there was a course reversal after that, with net outflows through Q1 fiscal 2020. Indeed,
the net outflow from debt funds between fiscal 2015 and Q1 fiscal 2020 was around 28 billion.

Liquid/ money market funds, on the other hand, saw stable net inflows of Rs 2.1 trillion during
the period.

Equity funds lead net flows for industry

4,000
3,430

3,000 2,718
Net flows (in Rs bn)

2,000
1,342
1,033
831 765 1,097
1,000 541
176
(220)
0

(494)
-1,000

-2,000
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 Q1
FY20
Equity Debt Aggressive hybrid (Balanced) Liquid / Money market Others Total

Source: AMFI

Categories as Q1 FY 20 have been mapped with old categories in order to maintain comparability with historical AUM
Equity includes other ETFs, arbitrage, balanced advantage, equity savings categories
Debt includes conservative hybrid funds
Others include solution oriented funds (wherever split available), gold ETFs, fund of funds - investing overseas

47
 Industry added over 44 million folios since March 2014, mostly individual in-
vestors

The mutual fund industry has seen growing participation from households in recent years,
given growing awareness, financial inclusion, and improved access to banking channels.

The industry added 44.2 million folios between March 2014 and June 2019.

Almost the entire growth in folios came from the individual investors segment (retail & HNI),
which logged a CAGR of 15.5% over this period. Their average ticket size, too, increased from
~Rs 102,000 in March 2014 to ~Rs 169,000 in June 2019.

Institutional investor folios, on the other hand, saw no significant addition. However, their
average ticket size more than doubled from Rs 11.5 million in March 2014 to Rs 23.1 million
in June 2019.

Growing base of individual investors, with increasing ticket size

90 168 169 180

165
159
80 160

Average ticket size (in Rs '000)

135
70 140
No. of folios (in mn)

133
60 120

50 100
84 102

40 69 80
65
58
30 60

20 40

10 20
48 47 46 42 39 41 47 55 71 82 83
- -
Mar-10

Mar-11

Mar-12

Mar-13

Mar-14

Mar-15

Mar-16

Mar-17

Mar-18

Mar-19

June-19

No. of folios Average ticket size (RHS)

Source: AMFI

48
Research

Institutional investors see average ticket size double, amid stable folio count

0.70 23,446 25,000

23,085

22,857

Average ticket size (in Rs '000)

0.60
20,000
No. of folios (in mn)

0.50

14,318
15,376 15,000
0.40
11,472
13,037

0.30 8,827 10,000

7,254
6,283
0.20
7,107
5,000
0.10
0.41
0.43

0.37

0.37

0.57
0.49
0.40

0.46

0.44

0.44
0.38

0 0
Mar-10

Mar-11

Mar-12

Mar-13

Mar-14

Mar-15

Mar-16

Mar-17

Mar-18

Mar-19

June-19

No. of folios Average ticket size (RHS)

Source: AMFI

Increase in individual participation takes their share to 58% of AUM

Recent years have seen the mutual fund assets attributable to individual investors surpass
those of the institutional segment. AUM of individual investors grew from Rs 4 trillion in
March 2014 to Rs 14 trillion in June 2019, logging a 27% CAGR. Consequently, its share in-
creased from 48% to 58%. AUM of institutional investors, on the other hand logged a slower
18.1% CAGR from Rs 4.3 trillion to Rs 10.2 trillion.

49
 Individual investors now account for nearly 3/5th of industry assets

30,000 70%

58% 58%
54% 55% 60%
25,000

10,204
51% 52%

9,981
51% 51% 50%
48%
45%

9,638
50%
20,000

8,819
40%
billion)
bn)

15,000

Share of AUM (%)

RsRs

13,815

14,046
30%
(in(in

6,043
AUM

11,722
AUM

5,250

10,000
20%
8,728
4,251
3,469

6,286
3,366

2,706
2,929

5,000
5,577

10%
4,002
3,556
3,171
2,780

3,040

- 0%
Mar-11

Mar-12

Mar-13

Mar-17

Mar-18

Mar-19

June-19
Mar-15
Mar-10

Mar-16
Mar-14

Individual investors Institutional investors Share of individual investors' AUM (RHS)

Source: AMFI
Based on month-end AUM

Individual investors invest mainly in equity funds, prefer hand-holding by

distributors

As of June 2019, 57.4% of individual investors’ AUM was into equity-oriented funds, whereas
institutional investors mainly preferred the fixed-income segment (debt and liquid/ money
market), which constituted 77.2% of their assets.

50
Research

Category-wise AUM split of individual investors and institutional investors (June 2019)

Individual investors Institutional investors

Aggressive
Aggressive
hybrid Equity 21.4%
Others hybrid
(Balanced)
0.3% (Balanced)
11.7%
1.1%

Debt
24.3%

Debt
Liquid / 33.1%
Money Liquid /
Equity Money
Others market
57.4% 6.4% market
0.3%
44.1%
Source: AMFI
Based on monthly average AUM
Equity includes other ETFs
Others include gold ETFs and fund of funds – investing overseas

Institutional investors had over two-thirds of their mutual fund assets invested through
direct plans, largely owing to greater savviness and faster adoption. Individual investors,
on the other hand, invested largely through regular plans (~83% of their AUM), indicating a
preference for hand-holding by distributors.

AUM split of regular and direct plans (June 2019)

Individual investors Institutional Investors

Direct Regular
30.7%
17.3%

Regular Direct
82.7% 69.3%

Source: AMFI
Based on monthly average AUM

51
Mar Jun
2014 2019 Mar Jun
0.7% 0.1% 2014 2019
11% 0.7% 0.2%
17%

28% 26%
56% 31%

9%
57% 31%
2%
Uttarakhand 5%
30% 42%
1% 38%
14%

Odisha
Mar Jun
2014 2019
2.0% 0.4% Mar Jun
2014 2019
32% 31%
0.9% 0.2%
17% 15%
25%
48%
5%
33%

1% 56%
39% 12%
16%
1% 41%
Mar Jun Puducherry
24%
2014 2019
0.9% 0.2%
22% 21%
Andaman and Nicobar Islands
Lakshadweep

53% 33%
5%

1% Aggressive
40% Equity hybrid Liquid / Others
Debt
23% Money
(Balanced)
market

52
Source: AMFI
Based on monthly average AUM
Equity includes other ETFs
Others include gold ETFs and fund of funds – investing overseas
Research The top 5 states continued to dominate the mutual fund industry, with around
70% share of AUM, and logging a healthy 21.5% CAGR between March 2014 and

Top 5
June 2019. As of June 2019, Maharashtra held lion’s share (42%) of the assets,
followed by other states with single-digit shares.

states While the AUM of the top 5 states grew at a healthy pace of 21.5% CAGR between
March 2014 and June 2019, the AUM of the remaining states (including union
remain in lead, territories), however, grew at a faster rate of 24.4%.
but smaller towns
growing faster AUM share of top 5 states

State Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 Jun-19

Maharashtra 47% 44% 44% 43% 41% 41% 42%
New Delhi 8% 10% 10% 10% 10% 9% 9%
Karnataka 7% 7% 7% 7% 7% 7% 7%
Gujarat 5% 6% 6% 6% 7% 7% 7%
West Bengal 5% 5% 5% 5% 5% 5% 5%
Total 72% 71% 72% 71% 70% 70% 70%
Source: AMFI Based on monthly average AUM

In terms of asset allocation of the top five states, the share of equity-oriented
funds has increased significantly over the past five years. As of March 2014, Gu-
jarat had the highest allocation (30%) to equities. However, the other four states
have caught up since then, aligning to a more balanced asset mix.

T15 and B15 AUM – March 2014 to March T30 and B30 AUM – June 2019
B30 & T30 Split of AUM - June 2019
2018
19%

16% 17% 4.3

16% 16%
3.1
B30
15.5%

2.2
1.9

1.4

T30
7.6 10.2 11.4 15.5 18.4 84.5%

Mar-14 Mar-15 Mar-16 Mar-17 Mar-18

T15 B15 Share of B15 AUM (RHS)

Source: AMFI Source: AMFI

Based on monthly average AUM Based on monthly average AUM

Talking of cities, majority of the mutual fund assets were held in the top 15 (T15)
cities. However, boosted by the regulator’s move to allow asset management com-
panies to charge an additional 30 bps expense ratio to incentivise penetration in
smaller towns (beyond top 15, or B15 cities), this segment saw rapid growth and its
AUM share went up from 16% in March 2014 to 19% in March 2018.

53
Then, in February 2018, fund houses were allowed to charge the additional 30 bps in
beyond top 30 (B30) cities instead of B15. As of June 2019, this segment accounted
for 15.5% of the industry’s assets, translating to Rs 4 trillion in value.
 Passive funds continue to garner traction

While active funds continue to dominate the Indian mutual fund industry, the passive seg-
ment has been gaining steam gradually, thanks to investments by the Employees’ Provident
Funds into ETFs. The share of passive funds rose to 5.8% of the total assets as of June 2019,
dipping slightly from 6.1% at close of fiscal 2019. The value of passive funds’ assets stood at
Rs 1.4 trillion as of June 2019.

Passive funds on a steady uptrend

30,000 7.0%
6.1%
5.8%
25,000 6.0%

Share of passive funds

3.8%
5.0%
20,000
AUM in Rs bn

3.0%
4.0%
15,000
2.0% 3.0%
2.1% 2.0% 1.5%
10,000 1.7%
1.3% 2.0%
0.5%
5,000 1.0%

0 0.0%
Mar-10

Mar-11

Mar-12

Mar-13

Mar-14

Mar-15

Mar-16

Mar-17

Mar-18

Mar-19

Jun-19
Active funds Passive funds Share of passive funds (RHS)

Source: AMFI, CRISIL Research

Passive funds include ETFs and index funds
Based on month-end AUM

Equity ETFs dominate passive funds’ assets

100.0%

80.0%
% of passive fund assets

60.0%

40.0%

20.0%

0.0%
Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 Jun-19

Equity ETFs Debt ETFs Liquid ETFs Gold ETFs Index funds

Source: AMFI, CRISIL Research

Based on month-end AUM

54
Research

Annexure

55
 CRISIL-AMFI fund performance indices
Sr Index I n c e p t i o n Definition
No date
1 CRISIL-AMFI Equity 1-Apr-97 CRISIL-AMFI Equity Fund Performance Index
Fund Performance seeks to track the performance of the equity
Index funds. The index consists of mutual fund
schemes from large cap equity, large and
midcap equity, multicap, midcap, small cap
equity, focused equity and value & contra
categories
2 CRISIL-AMFI Large 1-Apr-00 CRISIL-AMFI Large Cap Fund Performance
Cap Fund Performance Index seeks to track the performance of large
Index cap equity schemes

3 CRISIL-AMFI Large 31-Mar-04 CRISIL-AMFI Large and Midcap Fund

and Midcap Fund Performance Index seeks to track the
Performance Index performance of large and midcap cap equity
schemes

4 CRISIL-AMFI Multi Cap 1-Apr-00 CRISIL-AMFI Multi Cap Fund Performance

Fund Performance Index seeks to track the performance of multi
Index cap equity schemes

5 CRISIL-AMFI Midcap 1-Oct-04 CRISIL-AMFI Midcap Fund Performance Index

Fund Performance seeks to track the performance of midcap
Index equity schemes

6 CRISIL-AMFI Smallcap 1-Apr-10 CRISIL-AMFI Smallcap Fund Performance Index

Fund Performance seeks to track the performance of small cap
Index equity schemes

7 CRISIL-AMFI ELSS 1-Jun-01 CRISIL-AMFI ELSS Fund Performance Index

Fund Performance seeks to track the performance of Equity Linked
Index Saving Scheme (ELSS)

8 CRISIL–AMFI Focused 30-Sep-04 CRISIL–AMFI Focused Fund Performance Index

Fund Performance seeks to track the performance of focused
Index equity schemes

9 CRISIL–AMFI Value 30-Jun-04 CRISIL–AMFI Value and Contra Fund

and Contra Fund Performance Index seeks to track the
Performance Index performance of value/contra schemes

10 CRISIL-AMFI 1-Apr-00 CRISIL-AMFI Aggressive Hybrid Fund

Aggressive Hybrid Performance Index seeks to track the
Fund Performance performance of aggressive hybrid funds
Index

56
Research

Sr Index I n c e p t i o n Definition
No date
11 CRISIL-AMFI 1-Jan-02 CRISIL-AMFI Conservative Hybrid Fund
Conservative Hybrid Performance Index seeks to track the
Fund Performance performance of conservative hybrid schemes
Index

12 CRISIL-AMFI Medium 31-Mar-10 CRISIL-AMFI Medium Duration Fund

Duration Fund Performance Index seeks to track the
Performance Index performance of medium duration schemes

13 CRISIL-AMFI Medium 30-Mar-01 CRISIL-AMFI Medium to Long Duration

to Long Duration Fund Fund Performance Index seeks to track the
Performance Index performance of medium to long duration
schemes

14 CRISIL-AMFI Gilt Fund 1-Apr-00 CRISIL-AMFI Gilt Fund Performance Index

Performance Index seeks to track the performance of gilt schemes

15 CRISIL AMFI Debt 1-Apr-00 CRISIL AMFI Debt Fund Performance Index seeks
Fund Performance to track the performance of the debt funds. The
Index index consists of mutual fund schemes from
medium duration, medium to long duration, gilt,
dynamic bond, short duration, corporate bond,
banking & PSU categories
16 CRISIL-AMFI Short 1-Apr-02 CRISIL-AMFI Short Duration Fund Performance
Duration Fund Index seeks to track the performance of short
Performance Index duration schemes

17 CRISIL-AMFI Liquid 1-Apr-00 CRISIL-AMFI Liquid Fund Performance Index

Fund Performance seeks to track the performance of liquid
Index schemes

18 CRISIL-AMFI Ultra 1-Apr-07 CRISIL-AMFI Ultra Short Fund Performance

Short Duration Fund Index seeks to track the performance of ultra-
Performance Index short duration schemes

19 CRISIL-AMFI Low 1-Apr-07 CRISIL-AMFI Low Duration Fund Performance

Duration Fund Index seeks to track the performance of low
Performance Index duration schemes

20 CRISIL–AMFI 1-Apr-00 CRISIL–AMFI Money Market Fund Performance

Money Market Fund Index seeks to track the performance of money
Performance Index market schemes

21 Savings Bank Rate 1-Apr-00 Savings Bank Rate Index has been constructed
Index using the following savings rate for the given
periods:

57
 Notes

58
Research

59
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