Here’s What Mutual Fund Folio Data Reveals About Investor Behaviour

June 10, 2024 Mutual Fund

Mutual Funds, particularly the equity-oriented ones, over the last few years have become a popular investment avenue. Thanks to AMFI’s Mutual Funds Sahi Hai campaign launched seven years ago.

The times of the COVID-19 pandemic, when people were locked down at home and focused more on saving and investing sensibly, proved to be best for the growth of the Indian mutual fund industry and investors too reaped handsome gains (since COVID-19 lows) from Indian equities.

Table 1: Gains in Financial Years for Indian Equities and Increase in AUM of Equity Mutual Funds

*S&P BSE Sensex- TRI returns considered
Data as of March 29, 2024
(Source: ACE MF, AMFI, data collated by PersonalFN Research) 

The fiscal year 2023-24 (FY24) turned out to be the best for the domestic mutual funds industry, as Assets Under management (AUM) spurted by nearly Rs 14 lakh crore to a record Rs 53.40 lakh crore as of March 2024 — an increase of over 35% from March 2023 and the second highest since the fiscal year 2020-21, when the industry had reported a 41% increase amidst the COVID-19 pandemic.

The strong gain in industry assets is also replicated in the growth in the folio growth of mutual funds. Folios or mutual fund accounts folios jumped to a record high of 18.15 crore, of which 13.97 crore are from equity-oriented schemes (including the passively managed index funds and ETFs).

Individual investors, which include the retail and HNI investors, have held over 60% of the industry’s assets with a majority (i.e. over 85%) in equity-oriented schemes, according to the AMFI data.

Image: Investor Categories Across Types of Schemes

1Data as of April 2024
(Source: AMFI) 

As of April 2024, individual investors held Rs 29.24 lakh crore in equity-oriented schemes, 55% higher than in April 2023.

Equity-oriented funds category has reported a net inflow of Rs 1.84 lakh crore in the fiscal, up from Rs 1.47 lakh crore in the previous fiscal. And what’s interesting is that both, men and women, have contributed to the growth in AUM of the Indian mutual fund industry.

Graph 1: Investor break-up based on AUM share

Data as of FY24
(Source: AMFI‘s Annual Report) 

Since April last year, various actively managed equity-oriented funds and hybrid funds have reported a significant rise in folio count.

Even passively managed index funds that are expected to replicate the underlying benchmark index, have as reported a sizeable increase in folio counts.

Table 2: Increase in Folios of Equity-Oriented Funds, Aggressive Hybrid, and Passive Funds

(Source: ACE MF, AMFI, data collated by PersonalFN Research) 

The table above reveals that small cap funds, sectoral funds, mid cap funds, multi-cap funds, value/contra funds, and other funds have seen a higher rise in folios. Some of these funds carry very high risk – for example, sectoral/thematic funds, small cap funds, and the mid cap funds.

What is striking is that despite valuations in the small-cap and mid-cap seeming stretched and the margin of safety narrowed, individual investors evinced interest in them as indicated by the rise in folios and inflows.

The S&P BSE Smallcap-to-Sensex ratio, a determinant of valuations in the small-cap segment, rose over 0.62 versus a long-term median of 0.45, as of June 6, 2024. These levels were last seen in 2018, just before the mid and small-cap crash of 2018-19.

The absolute count of small cap funds and sector/thematic funds is the highest, at 1.94 crore and 1.91 crore, followed by the flexi cap funds and other sub-categories of equity mutual funds.

Even near the market high and volatile Indian equity markets, investors have bought into most of these very-high risk equity schemes.

Graph 2: Net Inflows into Small Cap Funds, Mid Cap Funds, Large Cap Funds, and Sectoral/Thematic Funds

Data as of April 2024
(Source: AMFI, data collated by PersonalFN Research) 

Perhaps this comes as most investors have tasted investment success in the small-caps and mid-caps and are thus going ho by deploying their investible surplus into them.

[Read: Should Mutual Fund Investors Worry About BJP Falling Short of Majority? Know Here]

However, most investors, particularly the newbies, aren’t aware that small cap funds could be vulnerable during periods of market turmoil or volatility, market corrections, and bear phases. When many investors would sell in panic, small-caps and mid-caps could fall more and weigh on your portfolio returns. In other words, small caps and mid caps could elevate the risk to your investment portfolio.

Hence, it is truly imprudent to skew the investment portfolio small cap funds and mid cap funds. Before adding small cap funds and mid cap funds, pay heed to their stress data and evaluate the performance across market cycles (rather than looking at lone historical 1-year, 3-year, and 5-year returns that do not reveal much).

Watch this video to learn more about the risk of investing in small cap funds:

Also, in the case of sectoral /thematic funds do note that they are cyclical. Meaning, that the sector/thematic fund’s performance is closely linked to the performance of the underlying sector/theme. Sector/thematic funds do not necessarily provide attractive returns at all times. If the respective sector/theme does not perform well, it will reflect on the scheme’s performance. Hence, there is a high concentration risk.

Currently, at a market high and amidst uncertain times such as these, ideally, large-caps or large cap funds are a more meaningful choice.

[Read: 3 Best Large & Mid Cap Funds for 2024]

[Also read: 5 Best Mutual Fund Types to Benefit During Modi’s Third Term]

Avoid chasing past returns of small cap funds, mid cap funds, sectoral funds, or any scheme for that matter.

Keep in mind that past returns are in no way indicative of future returns. Giving much importance to past returns would be akin to driving a car looking at the rare view mirror most times, which would potentially prove disastrous.

Also, not all New Fund Offers (NFOs) that are launched may be worth your hard-earned money. Some NPOs deserve to be skipped. Investors have bought numerous NFOs giving into the Rs 10/- proposition, considering them to be cheap.

When you choose the best mutual funds, consider a host of other factors such as the risk ratios, the risk mitigation measures at the fund house, the portfolio characteristics of the fund under consideration, the credentials of the fund manager, the performance of schemes under his watch, and whether the expense ration levied is well-justified by the performance of the scheme, and the investment processes and systems followed at the fund house.

Moreover, so that you not just select among the best mutual funds but also the suitable ones for you consider your age, risk profile, broader investment objective, the financial goals you wish to address and the time in hand to achieve those envisioned goals.

Avoid following the herd and mindlessly skewing your portfolio to small-caps, mid cap funds, and sector funds. Be a thoughtful investor.

Happy Investing!

This article first appeared on PersonalFN here