In this post, we analyse the assets and flows in India’s mutual fund industry in the month of December 2024.
Total Assets Under Management (AUM):
Total AUM of all schemes declined by 1.69% over November 2024 to Rs 66.93 lakh crores but was still an impressive 31.81% up over the December 2023 number. That number was 50.77 lakh crores. The AUM year on year growth last month was 38% and the downfall in the markets has dragged the growth rate down but is still quite a good number. Nifty 50 was down 2.02% in December. Its one year return is 10.09%. Mid caps and small caps were up 1% and 0.2% respectively in one month.
Debt assets ( or funds in debt schemes) were down 7% as overnight, liquid and money market funds saw significant net outflows. Equity assets were up 0.71% to 30.57 lakh crores. Hybrid assets were flat at Rs 8.76 lakh crores. Assets under management of mid cap and sectoral schemes was up by two odd percent. Sectoral schemes net inflows jumped twice over that in November 2024 mainly driven by NFOs.
Over the last ten years, the broader market (Nifty 500) has given a return of 19%. Out of twenty sectoral indices, only ten have given a return more than 19%. The highest return of 29% was given by realty index followed by metals at 27.27%. Surprisingly, financial services and banks were lagging the broader market at 10% only. PSU banks have outperformed at 22% whereas private banks were at 7.42 % only. The returns of the broader market are an average of the returns of all the sectors and their stocks. It’s quite hard to determine which sectors will do well. Even the FMCG sector has lagged though consumer durables has done well. Since the broader market is an average of all the sectors and stocks, its volatility will also be lower than that of the sectoral indices. Nifty 500 one year volatility is 15% and only Pharma, FMCG and healthcare had slightly lower volatility than 15%. The highest volatility was shown by PSU bank at 29% followed by media and realty. Investors are advised to consider the volatility of sector funds too while determining their asset allocations.
Equity schemes:
Gross and net inflows were up for both equity and hybrid schemes in December 2024 over the previous month. Gross flows into equity at 72,115 crores and net inflows at 41,115 crores were up by 17% and 14.5% respectively. Mid cap and small cap funds are seeing increase in both gross and net inflows though the outflows in mid caps seems to be increasing too. Does this explain the resilience of these indices in this month?
Sectoral funds AUM is now the largest in the equity category by a mile. It is at 4.72 lakh crores and will likely cross 5 lakh crores by March 31, 2025. It has become the single largest AUM category since liquid funds saw huge outflows in December. While liquid may come back in January, it is likely that the steady inflow into sectoral funds will make it the largest category of schemes in a short time barring other ETFs. These ETFs have many institutional investors and hence may keep growing too.
Are investors taking advantage of the dip in the markets to increase their exposure. Arbitrage funds have seen an outflow in the month. Long investors of course will benefit by investing at lower levels. The recent downturn in the markets over the last 3-4 months is also good for SIP and STP investors who get an opportunity to lower their average cost of investments and improve their long term returns. But those looking for short term high returns may face disappointments. We will have to wait and watch. The drivers of the markets in the short term will be quarterly results, the budget, the change of guard in the US, the US Fed and RBI monetary policy actions, etc.
Hybrid schemes:
Hybrid funds gross inflows (excluding arbitrage schemes) was Rs 13,279 crores which is around 20% of the gross inflows into equity schemes. Indian savers are still addicted to fixed income investments. They still love guaranteed returns and the higher the better. Instead of falling to scams, they will be better off investing in hybrid schemes. Those with a lower ability to stomach risk can look at conservative hybrid funds or multi asset allocation funds which have give decent low volatile returns over the years.
Number of mutual fund schemes:
The mutual fund industry offers a total of 1666 schemes of which 1552 are open ended schemes and 114 are close ended schemes. There are 315 debt schemes, 481 equity schemes of which 190 are sectoral schemes. The number of hybrid schemes are 160 and the number of index funds and ETFs are 556. Given the change in taxation laws, the number of close ended schemes have dwindled else the total number of schemes would have been very high.
How to select a mutual fund scheme?
How does one navigate so many schemes? Also, given the plethora of schemes, it is natural to invest in many schemes and over-diversify your assets. Its best to start with your asset allocation. Determine your optimal allocation to equity, debt and gold. Thereafter, allocation assets to large, mid and small cap schemes. A good proportion would by 60-25-15. Allocation to debt could be across money market, gilt, corporate bond and medium duration schemes. Gold exposure can be taken via ETFs or FOFs investing in Gold ETFs. A number of 2 schemes in each of these categories should be sufficient. A total of ten schemes across all these asset classes should be a good number to target. Consider 3 & 5 year performance, standard deviation of these returns, portfolio turnover ratio and fund manager duration while selecting schemes. Review these parameters at least once a year if not twice. If you use the above criteria, you will most probably not consider New Fund offers. NFOs can be considered for allocation to new themes. In any case thematic allocation should not exceed ten percent of your equity allocation. Allocation to debt assets can cover investment in CDs, PPF, etc. Tax aspects should be considered while choosing all investment options.
If this sounds overwhelming, one can take the easy way out by looking at mutual fund scheme ratings issued by Crisil, ICRA and other such agencies. They do the rankings on a similar basis as discussed above. One can invest in four star rated schemes since we are not a fan of five star schemes since the only way for them is to go down.
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