The recent data put out by the Association of Mutual Funds of India (AMFI) records a sharp increase in the number of folios of mutual funds. Folios record the unique mutual fund accounts and not the unique mutual fund investors. That means an individual can have, and usually does have, multiple folios. However, the growth in folios is broadly indicative of the retail interest in mutual funds; especially equity funds. Let us look at the data! For the calendar year 2017, mutual funds added a total of 1.37 crore new folios taking the total folios in India to 6.65 crore. Out of these, a large chunk of folio accretion has happened in equity funds, ELSS funds and balanced funds which broadly indicate retail appetite. In fact this is reflected in the investment of Indian mutual funds in the equity markets and their inflows have far outpaced that of FPIs. Let us look at the MF flows into equity markets in the last one year.
Mutual fund flows into equities in 2017
Bond returns have been consistently going down. Bank FD rates are just a tad above inflation and that is not exciting the retail investors too much. Retail investors are realizing that they need to participate in equities to generate wealth in the long run. Direct equities are too risky as they have experienced in the past. On the contrary, diversified equity funds have proved their capability to outperform the index consistently over the longer period.
Small savings were a preferred route for many retail investors; young and old alike. There are two factors working against these small savings. Firstly, the government has been cutting the rates on small savings as is already evident in the case of PPF and the RBI bonds. Additionally, the tax breaks that small savings they enjoyed could also reduce if the Income Tax Act shifts them to the EET model from the EEE model. Equity funds appear to be a better option.
Most retail investors are realizing the need to create a financial plan and once the plan is created they are realizing the futility of focusing on debt when they can afford to take the risk of equities. Small investors are realizing the actual corpus they will require in the long run and how equity mutual funds can help them build that corpus over a longer time frame.
Small investors are finally realizing the importance of discipline and the power of systematic investment plans (SIPs). That is evident from the sharp increase in SIPs. Investors are able to match their investments to their regular cash inflows and this has given them the dual benefit of rupee cost averaging as well as long-term wealth creation.
Equity funds are extremely tax efficient. Here is why! The dividends received on equity funds is totally tax free in the hands of the investor. Even the capital gains get preferential treatment in case of mutual funds. Short term gains (held for up to 1 year) are taxed at a concessional rate of 15% while long term gains (held for more than 1 year) are entirely tax free. If you investing in an ELSS, you get the additional benefit of exemption under Section 80C of the Income Tax Act. This tax-free status has been quite important in attracting investors to equity funds.
The introduction of direct plans by SEBI a few years ago has been instrumental in creating mass awareness of the benefits of investing in mutual funds. In the direct plans, investors do not have to pay entry loads and this reduces their cost ratios substantially. Over a longer period, their funds tend to outperform the indices more decisively.
The shift towards equity mutual funds investment appears to be obvious and with 6.65 crore folios, it finally appears to be attaining critical mass. Like in the US, the surge in retail investments is finally making equity mutual funds an important class in India!