What's In Store For The Indian Mutual Fund Industry In 2019 And Beyond?
Jan 03, 2019

Author: PersonalFN Content & Research Team

As you must be aware, the Securities and Exchange Board of India (SEBI) has introduced a whole host of changes for the mutual fund industry in the recent past.

So be it the banning of upfront commission, capping the Total Expense Ratio (TER), reclassification of schemes, and introducing the rules for benchmarking the performance, SEBI has taken a number of decisions to protect investors’ interest.

All these improvements are likely to have far-reaching effects on the Indian mutual fund industry.

Recently, the Confederation of Indian Industry (CII) and McKinsey published a report giving cues about what the future might look like for the mutual fund industry. According to which, the industry is likely to grow at the compounded annualised rate of 18% until 2023 to become Rs 50 lakh crore industry.

The report highlighted the transition of Indian investors from being passive and conservative to active and assertive. It noted that the Assets Under Management (AUM) of the mutual fund industry as a percentage of bank deposits grew from 12% to 20% from 2015. Growth in SIPs (in Systematic Investment Plans) supports this finding.

In other words, the report reiterates that demonetisation helped mutual fund industry grow. Nonetheless, campaigns such as Mutual Fund Sahi Hai have also contributed to the growth of mutual funds.

Acknowledging the decision of SEBI to reshuffle the criteria for allowing additional TER from B15 towns to B30 towns, the report sounded optimistic about the penetration of industry.

However, the report has warned mutual funds against potential complacency. Cautioning the industry, the report noted, “To be successful in this new market environment, asset management companies (AMCs) need to re-evaluate their existing business models and incrementally build new capabilities to serve the evolving investor base across products and solutions, digital channels and new white spots across geographies.”

While it’s difficult to predict how the industry will look like in 2023, since there are too many changes the industry is coping with at present, but, here are the trends that might unfold in 2019.

Passively Managed Exchange Traded Funds (ETFs) may gather momentum

If the macroeconomic environment remains challenging and if we witness political uncertainty, pure large-cap oriented schemes might find it difficult to outperform large-cap Index ETFs in 2019. Since large-cap funds are expected to invest at least 80% of their assets in top 100 stocks, there’s little scope to find mispriced opportunities for actively managed funds.

Given that India is a developing economy, the Indian equity market will continue to offer promising investment opportunities for alpha generations to the fund managers of active funds.

If they fall further, mid and small cap funds might offer opportunities wealth creation opportunities to long-term investors.

Despite the steep fall in their market capitalisation, to the tune of 50%-60% in some cases, mid and small cap stocks appear overpriced as compared to their large-cap counterparts even on forward-looking price-to-earnings multiples.

If Indian markets fall further around elections or if a global event drags them lower, small and midcap companies could start looking attractive. Fund managers of process-driven fund houses might take advantage of the market volatility to buy some quality stocks for the long term.

Thus, avoiding mid and small-cap funds entirely may prove to be imprudent in 2019.

Mutual Funds will have a tough job to maintain the growth in SIP accounts

Many new investors that have participated in the markets through mutual fund SIPs over the last few years haven’t seen any extended bearish phase of the market. If the markets fail to generate attractive returns even in 2019, some investors might consider discontinuing their SIPs. That’s the real challenge mutual fund houses may have to deal with this year.

Banning of upfront commissions might pose short-term challenges

Discontinuation of upfront commissions may have a bearing on the AUM growth of the Indian mutual fund industry. Distributors might refrain from pushing mutual fund products due to the lack of incentives.

Lump-sum investments might dry up substantially and the new SIP volumes may be insufficient to compensate the shortfall. Moreover, if Foreign Institutional Investors (FIIs) decide to pull out money even in 2019, the domestic mutual fund industry might also see some outflows due to falling markets.

Subsequently, mutual fund houses might start rolling out more index and strategy-based ETFs, which is evident from the recent launches. On the other hand, the distributor fraternity might try to sell you more insurance-cum-investment products to earn higher upfront commissions.

How can you, the investor, safeguard your interest?

  • Before investing in a mutual fund scheme, recognise your risk profile, investment objectives, financial goals, and the investment time horizon among other factors

  • Draw up a personalised asset allocation plan based on the factors above

  • Invest via SIPs

  • Prefer direct plans

  • Invest in mutual funds coming from process-driven fund house that have a dependable track-record

Don’t pick mutual funds based on past returns; they may not sustain going forward. Look at the qualitative factors instead. Also, do note that selecting a winning mutual fund based on star ratings has become less relevant after SEBI’s categorisation norms.

[Read: Why Qualitative Aspects Are So Important To Pick Mutual Funds]

Your investments might help the industry grow by leaps and bounds, but shouldn’t you be more concerned about the performance of your portfolio, rather than the performance of the industry?

Thus, choosing the mutual funds wisely is crucial.

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