Mutual funds in India recently have struggled with high profile calamities like Franklin Templeton. The current economic crisis is certainly not helping. Will the Indian mutual fund industry see a comeback from this
Mutual funds in India have been the darling investment vehicle for Indians in the last decade or so. As per data shared by the Association of Mutual Funds in India (AMFI), Assets Under Management (AUM) for the Indian Mutual Fund Industry increased from c.$96.5bn in August 2010 to $373bn as on August 31, 2020 (USDINR FX = 73.52), a 4 fold increase in 10 years. As on August 31, 2020, there were about 92 million mutual funds accounts (or folios in industry parlance) in India.
This tremendous growth has been made possible on the back of various factors. These include an increase in domestic household incomes and increased inflows from Foreign Portfolio Investors (FPIs) into emerging markets as they searched for higher returns in a “low yield world” in the wake of the Global Recession of 2008. Data from the FPI monitor of the National Securities Depository Limited (NSDL) shows that Net Investments by FPIs have been mostly positive every year since the turn of this century. This is shown in the graph below. Net Investments from this source amounts to $245bn for the period shown in the graph.
Over the last few years, India's capital markets, under the oversight of the Securities and Exchange Board of India (SEBI) have also evolved into a mature global financial market. However, recent developments in the industry and the macroeconomy have dealt a strong blow to this burgeoning industry. As you can see from the graph above, following a very positive 2017-19, Net Investments into debt funds have been largely negative over the last 3 years. One of the serious consequences of this trend has been Franklin Templeton's decision to freeze and wind down 6 of its high yielding funds in April 2020 on the back of sharp outflows, as per press reports. The funds, which had $3bn under management, dealt a significant blow to the industry. Adding to the woes, the ongoing macroeconomic crisis caused by the outbreak of Covid-19 has also not let the industry recover.
The current macroeconomic uncertainty, the rise of ESG, among others are a few aspects that Indian companies would need to pay close attention to if thet wants to keep the attention of domestic and foreign capital. As is evident from the trends discussed before, uncertainty in global markets usually weighs heavily on Emerging Market assets and India is not immune to that. This is expected to lead to fluctuations in the short to medium term. e.g. after a challenging start to 2020, equity mutual funds enjoyed some recovery in the middle of the year, as per some press reports.
However, jitters about a second wave continued stress on the global economy has recently started spooking investors who are now reportedly pulling money out of Emerging Markets. A press report dated 24 September suggested that foreign investors pulled out $241m from Indian equities during the week. Additionally, increased focus of asset managers on environmental, social and corporate governance aspects of companies might be another challenge for the Indian private sector if it does not start aligning its reporting, processes etc to global standards.
While the current situation looks grim, the mid to long term outlook for the Mutual Fund Industry in India still looks promising. First, compared to the rest of the world, Indians are just warming up to investments into Mutual Funds. Data suggests that at just 11 per cent of GDP, the penetration of Mutual Fund in India is much lower than the global average of 55per cent and 103per cent for the USA. With SEBI, India also has a proactive and dependable regulator for its financial markets. A positive and tangible result of SEBI's world-class oversight is that the World Bank's Ease of Doing Business report ranks India at #13 in Protecting Minority Investors, giving it an advantage among many other emerging markets. Finally, the current crisis has pushed the world into another extended period of low-interest environment. Indian equity and debt securities might continue to deliver relatively attractive risk-adjusted returns compared to many other asset classes.