Even as a vociferous debate around demonetisation’s impact on the Indian economy continues on its first anniversary, the mutual fund industry is clear that it is to be counted amongst the beneficiaries."Demonetisation is a major cause of the growth in mutual fund inflows. It hurt real estate and gold, besides prompting banks to ease interest rates as they were flush with liquidity. Mutual funds offered much higher returns, attracting more retail investors to the fold," said Sunil Subramaniam, CEO, Sundaram Mutual Fund.
Its larger impact on the economy too will help in the long run is the dominant view in the industry. "We had 12% of GDP in currency notes. This restricted our ability to create credit for fund investment to accelerate growth. With demonetisation, around Rs 3 lakh to Rs 4 lakh crore has moved from tijoris to bank accounts," said Nilesh Shah, CIO, Kotak Mutual Fund. However, he feels that it’s up to the industry to make the most of the opportunity. "While demonetisation has provided a penalty goal, we still have to kick the ball in the right direction of the goal post," he said.
Prime Minister Modi’s extraordinary move that rendered Rs 1,000 and Rs 500 denomination notes invalid might have had a cataclysmic impact on many a business, but the industry’s assets under management (AUM) have soared since the announcement. “The overall industry AUM is up 32% and continues to grow at a rapid pace,” a Morningstar India report on demonetisation noted. Inflows into equity and balanced funds in particular have been very strong. “From November 2016 to October 2017, equity funds have received inflows of Rs 1.35 lakh crore and balanced funds have received Rs 74,000 crore. This represents a huge jump in the flows received in these categories a year prior to demonetisation (around Rs 41,000 crore and Rs 20,000 crore respectively),” the analysis stated.
The increase in retail investors’ share in the overall mix is another noteworthy trend. Individual investors accounted for 45.4% of overall assets in October 2016; this figure touched 48.5% in September 2017. “Individual investors have been fairly active over the last few years and increasingly so in the last one year,” said Kaustubh Belapurkar, Director-Manager Research, Morningstar Investment Adviser India. He cites increased awareness and the relative unattractiveness of traditional investment avenues like real estate and gold as the key reasons for this surge. Individual investors increased allocation in all asset classes, but equities emerged favourites, with a 46% increase in AUM from this class of investors. “This has resulted in a shift in asset allocation towards equities - from 59.6% in Oct 2016 to 64.3% in September 2017,” he pointed out.
Heightened interest amongst retail investors in B-15 cities (the ones beyond the list of top 15 geographical locations in the country) has paved the way for providing some much-needed depth to the sector. B-15 cities (largely individuals) increased their allocations to funds proportionately and currently account for 17.7% of the overall industry AUM as of September 2017, up from 17% in October 2016 prior to demonetisation. “B-15 cities have been witnessing a lot of activity around investor awareness and demonetisation was a much needed shot in the arm to help spur investments from smaller centres. We expect these numbers to only go up as more and more investors come into the fold,” said Belapurkar. Subramaniam attributed the development to SEBI rules and the intensive awareness campaign by the industry. "We can offer attractive incentives to distributors to source new investors from smaller cities, which helps. The industry's ad campaign too has played a role," he said.
Belapurkar believes that rise in retail interest is here to stay. "Systematic Investing Plan (SIP) book has been growing month on month and stands at Rs 5,500 crore per month as of September 2017. SIP flows tend to be more stable and thus will potentially add Rs 66,000 crore every year," he said.