Veteran Emerging Markets investor Mark Mobius said on Friday, "We are now in a long-term bull market for India. And I see the Sensex going up to 100,000 probably by the end of the year provided that the measures taken by SEBI do not put a big damper on the market." This bullish outlook on India's equity market has driven the rapid growth of mutual funds.
Mutual funds have become an increasingly popular investment option in India, due to their simplicity and diversification. Among the various types, direct mutual funds have become especially popular, particularly direct growth mutual funds. These funds allow investors to bypass intermediaries and brokers, resulting in lower expense ratios compared to regular mutual funds.
The mutual fund industry is witnessing exceptional growth in assets under management (AUM). According to data from the Association of Mutual Funds in India (AMFI), assets managed by the mutual fund industry increased by 40.7% from Rs 46.9 lakh crore in August 2023 to Rs 66 lakh crore in August 2024. The jump in mutual fund assets is also attributable to the increase in Systematic Investment Plan (SIP) contributions. More than 3 crore people have registered for SIP between April and August 2024 and the total number of outstanding SIP accounts has increased by 14.4% to 9.6 crore in August 2024 from 8.4 crore in March 2024.
Sridharan Sundaram, Founder of Wealth Ladder Direct, said, “There are two key reasons for this surge in mutual fund assets in the past year. One is that small and mid-caps jumped anywhere between 30-40% in the past year, and the second is the continuous inflow into mutual funds via SIPs to the tune of around Rs 20,000 crore every month.”
Mutual funds’ performance rebounds after falling in 2022
In this edition of the chart of the week, we examine the performance of equity mutual funds from three different angles. The first representation, a heatmap, shows the yearly returns of the major mutual fund categories over the past four years. It indicates that equity mutual funds have been doing well over the past two years. However, in 2022, these funds were under pressure due to rising inflation, interest rate hikes, and global conflicts disrupting the global supply chain.
In 2021, the lifting of Covid-19 lockdowns helped mutual funds post stellar returns, with small-cap funds leading the way with 63.3% returns. In March 2020, equity mutual funds saw significant declines due to COVID-19-induced lockdowns and economic uncertainty. However, by the end of 2020, there was a remarkable recovery driven by government stimulus measures and liquidity infusion by central banks. Equity mutual funds, particularly multi-cap funds, rebounded strongly, delivering returns of 37.32%.
Sectoral/thematic funds emerge as top performers based on one-year and five-year return
If we look at the second chart, sectoral/thematic, particularly infrastructure funds, dominate the top-performing mutual funds over the past year. Bandhan Infrastructure Dir Gr had the highest returns of 75.2% over the past year, while the five year compound annual growth rate (CAGR) of the fund is 32.9%. Also, certain mid-cap equity mutual funds, like Motilal Oswal Mid Cap Dir Gr, have also been at par with the infrastructure mutual funds, mainly because they offer a balance between growth potential and stability, attracting investors seeking diversification with the chance for higher returns compared to large-cap funds.
How has performance been over the long term?
The third chart shows that Quant Small Cap Dir Gr has the highest five-year annualized returns of 49.5%, outperforming the small-cap funds category average by 22 percentage points. Quant Mid Cap Dir Gr returned 38.5% over the past five years, enabling the fund to outperform its category average by 16 percentage points over the same period.
Within mutual fund houses, Quant Mutual Funds has seen impressive growth in AUM between August 2021 and August 2024. The mid cap fund experienced a remarkable increase of 5,340%, expanding from Rs 172 crore to Rs 9,367 crore. Similarly, the small cap fund's AUM grew by 2,342%, growing from Rs 1,045 crore to Rs 25,534 crore.
