Mutual Funds See Muted 2022; Expect Better Days In New Year

After a spectacular 2021, the mutual fund industry failed to continue the momentum this year with the growth in asset base, investors count and flows subsiding in 2022 on volatile market conditions, but the New Year is expected to be relatively better.

The industry grew at a slower pace in 2022, mainly due to global headwinds, including the Russia-Ukraine war, supply chain bottlenecks and a decadal high global inflation coupled with rising interest rates. The 2021 growth was mainly braced by a rally in the stock markets.

The assets under management (AUM) of the mutual fund industry rose by 7 per cent or Rs 2.65 lakh crore in 2022. This was way lower than a surge of nearly 22 per cent or an increase of close to Rs 7 lakh crore in the asset base seen in 2021, data from the Association of Mutual Fund Industry (Amfi) showed.

Swapnil Bhaskar, Head of Strategy, Niyo, said the mutual fund industry growth in 2023 is expected to be in line with the current trend with estimated assets under management of about Rs 44 lakh crore at the end of 2023. The growth would be driven by economic growth and retail participation from young investors.

However, industry body Amfi (Association of Mutual Funds in India) CEO N S Venkatesh believes that the industry will grow 16-17 per cent in 2023, aided by India's growth story, and upcoming budget announcements would support the growth.

The next year's growth would be fuelled by increasing awareness about the benefits of investing in mutual funds across asset classes along with a young generation of investors investing in the space as well as existing investors increasing allocations, said Kaustubh Belapurkar, Director – Manager Research, Morningstar Investment Adviser India.

As per the data, the AUM of the mutual fund industry rose to an all-time high of Rs 40.37 lakh crore in 2022 (till November-end) from Rs 37.72 lakh crore at the end of December 2021. It stood at Rs 31 lakh crore in December 2020.

The year 2022 also marked the 10th consecutive yearly rise in the industry AUM after a drop in two preceding years. This year's growth in the industry was supported by inflows in equity schemes.

The biggest adopters of mutual funds in 2022 have been young millennials and early Gen-Zs. Despite the volatility in the markets, the young generations are choosing to invest in mutual funds for returns to beat the inflation rates, said Manish Maryada, Co-founder and CEO of investment platform Fello.

The investor count is estimated to have expanded by 1.95 crore during the year. In 2021, a total of 2.6 crore folios were added.

The 43-member mutual fund industry saw net inflows of Rs 66,952 crore in 2022 (till November) as compared to Rs 1.88 lakh crore last year. This year's flows included a net withdrawal of over Rs 2 lakh crore from the debt-oriented schemes, while an investment of Rs 1.57 lakh crore into equity schemes.

Equity schemes, the most attractive factor for investors in the mutual fund space in 2022, have got Rs 1.57 lakh crore, as against Rs 96,700 crore in 2021.

These schemes have been witnessing incessant net inflow since March 2021, but the pace of flow slowed in November 2022, when their net inflows falling sharply by 76 per cent to Rs 2,258 crore.

Before March  2021, the equity schemes had witnessed outflows for eight straight months on account of the Covid pandemic.

Higher awareness about equities and their ability to create wealth over a longer term is what has led to this increase in flows in equity-oriented schemes this year.

"People are slowly realizing the benefits of professional money management wherein they can focus on their own jobs and leave the job of investing to professionals like the asset management companies. This saves them the time and efforts as well the stress caused by market volatility," said Akhil Chaturvedi, Chief Business Officer, Motilal Oswal AMC.

In 2023, flows are expected to be better than the current year as a result of systematic investment options or SIP becoming a default way of investing for regular investors and rising investor confidence, he added.  

Contributions to mutual fund schemes through SIP seem to be immune from the market volatility with inflow growing to Rs 1.36 lakh crore in 2022 from Rs 1.14 lakh crore in 2021. This also signifies the retail investor's increasing maturity.

"India is receiving almost USD 2 billion of retail inflows, which is remarkable compared to a few years ago. I think the SIP book has really held up well and can be given credit for some of the stability we've seen in capital markets despite the overall volatility in 2022," said Radhika Gupta, MD and CEO, Edelweiss AMC.  

On the other hand, increasing rate cycles and higher commodity prices weigh down on fixed-income funds. The segment has seen a net withdrawal of Rs 2 lakh crore this year -- much more than Rs 34,545 crore pulled out in 2021. Gold exchange-traded funds (ETFs) saw investors injecting over Rs 1,100 crore this year, down from Rs 4,814 crore in 2021.

The year also saw regulator Sebi taking a host of steps, including rules to include buying and selling of mutual funds under insider trading and placing a cap on the share of assets that an actively managed debt fund can park in a single company's debt instruments.

Going into 2022, equities as an asset class will continue to remain in focus. India's equity market is amongst the most heterogeneous globally with many alpha-generating opportunities, thereby favouring active fund managers.

Differentiated perspectives on investing, ease of access and great service to investors will be the defining aspects of which schemes ultimately garner interest, said Prateek Pant, Chief Business Officer, Whiteoak Capital Asset Management.