Surge of Mutual Funds Industry: The Changing Face of Indian Investments

 

  

Mohit Maneger Tiwari, 

II Sem

MBA 2024-26

SIBM, Noida

Mutual Funds have developed as a popular investing tool in the last several years as a way for the average investor to invest in the stock market without directly buying stocks. They have received higher returns than conventional investment products like fixed deposits and savings accounts. It also reduces the investing risks associated with direct equity investments. Systematic Investment Plans (SIPs) have significantly boosted their attractiveness, allowing disciplined, small, and regular investments.

The development path of the mutual fund industry in India has been relatively steep, as evidenced by data from the Association of Mutual Funds in India (AMFI). In May 2014, the Indian industry had an Asset Under Management (AUM) of about ₹10 lakh crore. This rose sharply to ₹59 lakh crore by May 2024, resulting in a sixfold increase in ten years. By  October 2024, the AUM stood at an impressive ₹67,25,614.61 crore, with ₹13,85,419.97 crore added in just seven months since March 2024, when the AUM was ₹53,40,194.64 crores [1].

                           Image: The progression of Assets over the last 6 financial years

Source: https://www.amfiindia.com/research-information/amfi-monthly

This extraordinary growth underscores the increasing participation of retail investors in mutual funds. The number of folios rose significantly from 17,78,56,760 at the end of FY24 to 21,65,02,804 by October 2024—a 22% increase—highlighting growing trust in Indian markets [1].

Mutual funds have also stabilized in equity markets during heavy Foreign Portfolio Investor (FPI) sell-offs. Retail investors, especially the large number of high net-worth individuals, backed off, and liberal institutional investors like mutual funds have come to the rescue of markets and are actively stabilizing them now. According to SEBI data, till September 2024, Domestic Institutional Investors(DIIs) have a 16.46% share in NSE listed stocks while FPIs have 17.5% [2]. The gap of just 1.04% is an all-time low, signalling the rising influence of  domestic investors. DIIs will continue their retail participation in more numbers in the future.

They will likely surpass FPIs in the ensuing years, providing a more substantial home ground for the Indian equity markets. The concentration also confirms India's mutual fund industry growth as a critical player in the country's financial markets. It helps to join retail and specific investor segments to generate wealth. The sector is poised for even more significant milestones with growing financial

literacy, investor education, and government initiatives promoting financial inclusion. DIIs flexed their muscles and established themselves in the Indian equity markets in October 2024 by buying shares above ₹ 1 lakh crore [3]. This is also a new record high for DIIs, which have never before invested more than ₹56,356 crore in a single month – March 2024 inclusive. On the same note, while FPIs sold stocks worth ₹85,390 crore during the same month, it underlines how DIIs help balance the market during high FPI selling.

DIIs have been net buyers throughout the year 2024 and have invested ₹4.41 lakh crore in shares till October [3] with two months still to go. This steady flow of funds from domestic sources is the growing realization by both, the individual and large investors for long term capital gains from the Indian market.

More importantly, mutual fund which is an integral part of DIIs had cash stock of ₹1.86 lakh crore in September 2024 [4]. This has placed DIIs in a better position where they can look to book profits on stocks vulnerable to FPI control and also strengthens the Indian market. Preventive portfolio management of DIIs also buffers the market from fluctuations and underlines their strategic position in creating an autonomous domestic equity market in India. Over the years, the contribution of India's top five cities—Mumbai, Delhi, Bengaluru, Pune, and Kolkata—to mutual fund AUM growth has significantly declined. 2016, these cities accounted for a substantial share of the industry's AUM. Nevertheless, by FY2024, their contribution was reduced to 52.6% from 72.2% [5]. Such a shift has so much emphasized on the involvement of investors from Tier 2 and other cities. The change is consistent with the rising dominance of Tier 2 and other cities in the investment industry of mutual funds. 

The growth of mutual fund assets in cities beyond the top 30 (B-30) underscores this trend. From March 2019 to March 2024, the AUM from the top 30 cities grew at an annual pace of 16%, rising from ₹17.66 lakh crore to ₹37.20 lakh crore. On the other hand, the B-30 cities posted a CAGR of 22 percent, and their AUM rose from ₹ 5,12,000 crores in March 2019 to ₹ 14,14,000 crores in March 2024. As a result, the proportion of B-30 cities in the overall mutual fund AUM rose from 21.5% in March 2019 to 26.3% in March 2024 to show the expansion in the investments from Tier II and small-scale cities [5].

Notably, between March 2020 and March 2024, Gandhinagar emerged as a standout performer, registering the highest AUM growth among cities with a CAGR of 48%. While the national CAGR for mutual fund AUM during this period was 24.5%, growth in major metros like Mumbai (17.8%), Delhi (19.9%), Bengaluru (24.1%), Pune (21%), and Kolkata (19.9%) lagged, reinforcing the rising dominance of smaller cities in the mutual fund space [5].

Over the years, the Indian finance industry has evolved into one whereby Indian financial institution remain vital to the country’s overall financial system. Today, with assets under management reaching sixfold in a decade and investor participation at an all-time high, mutual funds make a difference in saving and creating wealth for millions. Such changes as the promotion of domestic companies through joint ventures has increased the stability of the stock market which is highly fixated on foreign investment. In other words, Indian Financial system can rely more on Domestic investors rather than Foreign Institutional Investors. Additionally, mutual funds are reaching out to the non- metro Tier II and Tier III cities as seen in the accounts. There is increase in financial literacy, cheaper products such as SIPs, and shifts from traditional investments such as gold and silver to stocks. Going deeper into market integration, they are likely to play a more significant part in liberalizing economic investment and building up the Indian financial structure. The solid existence of mutual funds relies on immediate liquidity, constant monitoring, and assistance from regulator, where such financial structures are about to take an essential role in the Indian financial market.

References

1) Association of Mutual Funds in India (AMFI). (n.d.). AMFI Monthly. Retrieved 15

November 2024 (https://www.amfiindia.com/research-information/amfi-monthly)

2) Business Standard. (8 November 2024). MFs tighten grip on domestic stocks; FPI-DII

ownership gap narrows further.

(https://www.business-standard.com/markets/mutual-fund/mfs-tighten-grip-on-domestic-

stocks-fpi-dii-ownership-gap-narrows-further-124110801479_1.html)

3) Economic Times. (10 November 2024). Mutual funds sitting on ₹1.86 lakh crore cash in

September. Retrieved 15 November 2024, from

(https://economictimes.indiatimes.com/mf/analysis/mutual-funds-sitting-on-rs-1-86-lakh-

crore-cash-in-september/articleshow/114207914.cms?from=mdr)

4) Moneycontrol. (14 November 2024). DII buying hit a record ₹1 lakh crore in October,

even as FIIs offload equities worth nearly $11 bn.

(https://www.moneycontrol.com/news/business/markets/dii-buying-hits-a-record-rs-1-lakh-

crore-in-october-even-as-fiis-offload-equities-worth-nearly-11-bn-12855817.html)

5) Moneycontrol, 2024. Where are mutual fund investments coming from?

(https://www.moneycontrol.com/news/business/mutual-funds/where-are-mutual-fund-

investments-coming-from-12756432.html)