Exploring the mutual funds industry and its promising future in India

Imagine you have a long-term financial goal, such as buying a home or funding your child's education. However, you are unsure about a suitable investment avenue to achieve these aspirations. This is where mutual funds come into the picture, offering a potential solution to build wealth in the long run.
In recent years, India's mutual funds industry has witnessed remarkable growth and become a preferred investment choice for millions of individuals. This article explores the evolution, growth, and promising future of the mutual funds industry in India, shedding light on the emerging technology and trends shaping this dynamic sector.

Table of contents

• Evolution and growth of mutual funds in India
• Future of mutual funds industry in India
• Technological innovations: How fintech is transforming the mutual funds landscape
• Emerging trends in the Indian mutual funds industry
• Key takeaways
• Types of market trends and their implications on mutual fund strategy
• How investors can benefit from India’s mutual fund growth

Evolution and growth of mutual funds in India

The roots of mutual funds in India can be traced back to establishment of the first mutual fund Unit Trust of India (UTI) in 1964 by the RBI. Initially, the industry had a slow start, with limited awareness and participation from investors. However, as people understood the benefits over the years, the mutual funds industry picked up the pace.
In the 1990s, the Indian economy opened its doors to the world, turning into a liberal economy. To protect the investors’ interest, Securities and Exchange Board of India (SEBI) was established in 1992, and in 1993, the first set of SEBI regulations were drafted to include all mutual funds except UTI.
In addition, the introduction of fund categories, such as equity funds, debt funds, and hybrid funds, offered investors further choices as per their requirements and risk tolerance. However, the mutual funds industry also suffered a hit during the global slowdown in 2009, only to revive again in 2014. As per Association of Mutual Funds in India (AMFI), the Indian mutual fund industry crossed the Rs.10 lakh-crore AUM mark in May 2014 and is currently valued over Rs.43 lakh crore as on 31st May’23.

Future of mutual funds industry in India

The future of mutual funds industry in India seems bright. As per a report by CRISIL, the industry’s quarterly AUM is expected to increase at an approx. 14% CAGR between March 2020 and 2025. The rise in disposable income and the growing middle-class population have led to an increased focus on savings and investment. Additionally, the favourable demographic profile of India, with a large population of young investors, presents a vast untapped market for mutual funds.
Another major factor behind the rising popularity of mutual funds is the shift in investor behaviour, from traditional investment avenues (like fixed deposits and gold) to market-linked investments. Thus, Indian investors are increasingly recognizing the potential of mutual funds to build wealth over the long term.

Technological innovations: How fintech is transforming the mutual funds landscape

Fintech is significantly transforming the mutual fund sector in India, enhancing accessibility, efficiency, and personalization. Here’s how fintech is reshaping the industry:

1. Enhanced accessibility:

Digital onboarding: Fintech platforms have simplified account creation, allowing investors to complete KYC and open accounts online with minimal paperwork.

Democratization of investing: Fintech has made investing more inclusive, helping first-time investors explore and invest in mutual funds with ease.

2. Personalized investing:

Robo-advisors: AI-powered platforms offer tailored investment advice based on risk profiles, financial goals, and time horizons.

Gamification: Some platforms engage users by gamifying the investment process, making it more interactive, especially for younger investors.

3. Improved efficiency and convenience:

Paperless transactions: Online platforms facilitate paperless investing, reducing paperwork and improving processing speed.

Real-time tracking: Investors can monitor their portfolios and track market trends through mobile apps and online dashboards.

Automated investing: Tools like SIPs and automated portfolio rebalancing streamline investing, promoting disciplined and efficient management.

4. Cost-effectiveness:

Direct plans: Fintech platforms have increased the popularity of direct mutual fund plans, which come with lower expense ratios, potentially leading to better net returns.

Emerging trends in the Indian mutual funds industry

The Indian mutual funds industry is witnessing several noteworthy trends. Firstly, investors are increasingly considering the impact of their investments on the environment, society, and corporate governance practices. Therefore, ESG (environmental/social/governance) investments are in demand.
Another significant trend is the rise of index funds and exchange-traded funds (ETFs). These passively managed funds aim to replicate the performance of a specific index, such as the Nifty 50 or the Sensex, offering investors a cost-effective and diversified investment option. Index funds and ETFs have gained popularity due to their low expense ratios and potential for returns in line with benchmark.
Additionally, the mutual funds industry has brought together traditional and digital channels. Asset management companies are exploring multiple distribution strategies, combining the strengths of distributors, online platforms, mobile applications, and physical branches to provide a holistic investment experience to investors.

Key takeaways

• Established in 1964, the mutual fund industry in India has come a long way, evolving into a powerful investment avenue that caters to the diverse needs and aspirations of investors.
• With factors such as increasing awareness, favourable demographics, and technological innovations, mutual funds are set to play a vital role in shaping the wealth-creation journey of individuals in India.
• As technology continues to reshape the industry, mutual fund investors can expect greater convenience and transparency.

Types of market trends and their implications on mutual fund strategy

• Bullish trends: In a rising market, mutual funds often increase their exposure to growth stocks. Fund managers may identify sectors demonstrating strong growth potential, such as technology or renewable energy, aligning their investments with these trends.
• Bearish trends: During market downturns, mutual funds might shift their focus towards relatively more stable investments, like government bonds or stocks in industries less affected by economic downturns (like healthcare or utilities). This strategy aims to reduce volatility.
• Sideways markets: In stable markets, funds might adopt a more balanced approach, combining growth and value investments. Here, the strategy involves diversifying across various sectors and asset classes to minimize risk while still capitalizing on potential gains.
• Tech-driven trends: The increasing reliance on technology in investment strategies has led mutual funds to integrate data analytics, AI, and machine learning for better decision-making. This trend not only improves the accuracy of predictions but also allows for more dynamic and responsive investment strategies.
• Regulatory and economic changes: Changes in government policies or significant economic events can lead funds to reassess their risk profiles and adjust their portfolios accordingly. For instance, stricter environmental regulations might prompt a shift towards green investments.
• Global market trends: With the globalization of markets, international events and trends play a more significant role for Indian investors. Mutual funds may need to consider geopolitical events, currency fluctuations, and international trade agreements in their strategy.
• Demographic and social trends: Emerging demographic shifts and social trends can also shape mutual fund strategies. For example, an aging population might increase the demand for healthcare services, making healthcare stocks more attractive.
• Investor behavior trends: Understanding investor sentiment is essential. In times of uncertainty, investors might prefer stable, income-generating assets, influencing funds to adjust their strategies to match these preferences.

How investors can benefit from India’s mutual fund growth

The growing popularity of the mutual fund industry in India offers investors who have so far invested only in traditional avenues the chance to earn market-linked returns. Market-linked investment avenues offer the potential to earn inflation beating returns and build wealth over time. Mutual funds offer the following benefits:

Diversification: Mutual funds provide access to a mix of stocks, bonds, and other securities, which can reduce investment risk.

Professional management: Experienced fund managers make investment decisions, which can potentially yield better returns than individual investors could achieve independently.

Accessibility: Mutual funds cater to various investment amounts and risk profiles, making them accessible to a wide range of investors.

Affordability: They offer professional management at a relatively low cost, making them an affordable investment option. Moreover, investors can start their mutual fund journey with as little as Rs. 500 in many schemes.

Tax benefits: Equity-Linked Savings Schemes (ELSS) provide tax benefits under Section 80C of the Income Tax Act, 1961.

Systematic Investment Plans (SIPs): SIPs promote disciplined investing by allowing regular investments, regardless of market fluctuations, and can help with rupee cost averaging.

FAQs:

How has technology transformed the mutual funds industry in India?

Technology has substantially transformed the mutual funds industry in India, enabling easier access to investment platforms and online transactions. It has increased transparency and convenience, thereby empowering investors to make informed decisions.

Why are ESG (environmental/social/governance) investments gaining popularity in India?

ESG (environmental, social, governance) investments are gaining popularity in India due to increasing awareness of sustainability and responsible investing. Investors are recognizing the importance of considering environmental factors alongside financial performance, aligning their investments with their values, and contributing to a more sustainable future.

What are the advantages of index funds and ETFs in the Indian mutual funds market?

Index funds and ETFs offer several benefits in the Indian mutual funds market. They provide diversification, lower costs, and transparency by tracking specific market indices. These investment options can offer returns in line with benchmark index subject to tracking error, flexibility, and liquidity, appealing to investors seeking market exposure and a simple investment approach.

What are the primary risks associated with investing in mutual funds?

Investing in mutual funds might involve certain risks, such as market fluctuations, sector-specific risks, changes in interest rates, and economic downturns.

How do market trends influence mutual fund returns?

Market trends may impact mutual fund returns by affecting asset prices, investor sentiment, and a fund's performance compared to benchmarks.

What role does investor behaviour play in mutual fund investments?

How investors behave is important in mutual fund investments. It affects decisions about where to put money, how much risk to take, and how often to trade.

Can poor fund selection lead to losses in mutual fund investments?

Poor fund choices might cause losses due to high expenses, underperformance, and mismatched investment goals.

Is timing the market a viable strategy for maximizing returns in mutual funds?

Trying to time the market to maximize mutual fund returns might not be a good strategy. It involves trying to predict short-term changes, which is very difficult and often may lead to mistakes. Instead, you can consider starting an SIP for long-term wealth creation. An SIP yearly calculator can similarly help those considering Systematic Investment Plans (SIPs).

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.