Equity markets have seen a sharp recovery from Covid-19 lows, and continuous investor inflows have pushed the industry assets under management (AUM)* well past the Rs. 38 lakh crore mark for the financial year-ended 31 March 2022.
In March, the AUM* for the equity segment, at Rs. 13.6 lakh crores, surpassed that of the debt segment at Rs. 12.9 lakh crore for the first time. By comparison, just two years ago, in March 2020, equity AUM* stood at just Rs. 7 lakh crore, while debt AUM was at Rs. 10.3 lakh crore. Since then, there’s been a continuous month-over-month increase in AUM*. Even when you consider the hybrid schemes or multi-asset schemes, the allocation for equity is much higher.
Traditionally, Indian investors have always preferred investing in real estate, gold, and bank fixed deposits (FDs), but poor inflation-adjusted returns for these asset classes have led to a shift in investor preferences. Direct equity is still considered difficult by new investors, and most prefer to enter the markets via the mutual fund route. Between March 2020 and October 2021, benchmark equity indices had more than doubled, attracting many new investors to stock markets.
The fact that domestic inflows have been steadily increasing even during such tumultuous times over the past two years is a sign of increased investor participation and growing share of household savings into mutual funds. We also find newer investors in recent graduates who have just started working, as well as among the many who have shifted to the work-from-home (WFH) model. They are tech-savvy and adapt easily to online investing. Covid-19 lockdowns and low-interest rates have encouraged investors to start investing in mutual funds. Job uncertainties have also taught us the importance of regular savings, and this discipline reflects in the monthly systematic investment plan (SIPs) inflows.
While the flows in equity funds have seen robust growth, inflows into debt funds have been poor due to below-par returns, compared to bank FDs. In 2020 and 2021, large-cap funds generated average returns of 15-25 percent*** while most of the shorter-end debt fund categories have given average returns of 3-5 percent*** in the same time frame.
Increased participation by retail investors has also led to greater awareness about the various funds offered by asset management companies (AMC). While seasoned investors may prefer to invest directly with the AMCs, new investors prefer to do it via mutual fund distributors (MFD). While direct plans have lesser expenses, regular plans offered by MFDs help newer clients build up portfolios, plan SIPs, and carry out non-financial transactions like KYC updates, address changes, etc with ease.
Even senior citizens who earlier relied on a fixed income like deposits and debt funds, are now keen to explore mutual funds which offer better risk-adjusted returns.
Investors are also willing to stay invested for longer, even through periods of volatility. Earlier, retail investors would panic at the slightest dip. But now we see more investors ready to hold on through corrections of 10-15 percent**, with some even using it as an opportunity for lumpsum investments.
Indeed, the pandemic has slowly and steadily instilled a sense of financial discipline in the retail investor, thereby improving their preparedness for a rainy day.
Views are personal: The author – Adil Behram Driver, is the founder of trademark WAVES – Wealth AVEnueS
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