India’s small-town investors are flocking to mutual funds like there’s a sale at the local bazaar, and big-fish asset management companies behind these funds are making bank.
But if you look beyond the window dressing of financial inclusion being peddled by local media, you will see a level of risk that could get serious. Fast.
Digital broker Zerodha found that in the April-to-August period this year, over half of new money coming into Indian mutual funds came from Tier-2 and Tier-3 cities. (Think super-provincial like Bhopal or Lucknow).
Most of these rookie investors (almost 80%) are putting their cash in equity funds through systematic investment plans. Nearly half of mutual fund investors pull their money within two years, according to an Axis Mutual Fund survey.
Heard mentality
On paper, an increase in the number of small-town investors should stabilize India’s markets, says Vipin Dixena, the man behind Turtle Trading Desk and a former mutual fund salesman.
But are they making informed choices? Most follow the herd, and in small towns that means someone’s uncle, friend or cousin who might have made a killing, Dixena says. And when the market tanks, it is unlikely that these investors will have the financial nous to make an informed decision.
Most likely, they will panic and cash out at the worst possible time. The other issue with rookies: they often don’t get the need to mix things up a bit, aka diversify, to balance out the risk.
Because India’s markets have been on a bull run for what feels like forever, retail investors don’t necessarily understand that they could LOSE as well as gain.
Declines of 10% to 20% happen almost every year, and investors should factor in a 30% to 60% decline every seven to 10 years, says Robins Joseph, a research analyst registered with India’s market watchdog.
The mutual funds play
- The size of India’s mutual fund industry has grown sevenfold in the past decade.
- In just a year – from June 2023 to June 2024 – Indian asset managers saw their assets under management surge by 35%.
- And yet, only 15% of India’s population is into mutual funds, compared to a whopping 74% for the US. So there’s room for growth.
If you’re betting on the future of India’s mutual-fund industry itself, you’re probably in for some good times.
For one, expect more IPOs from the industry. The Securities and Exchange Board of India has not directly mandated asset managers to go public, but there is some nudging. It has been working on expanding the offerings that these firms can provide, such as riskier products for richer Indians, creating a situation where they might need to raise new cash.
The four existing listed big players – HDFC AMC, Nippon Life AMC, Aditya Birla AMC and UTI AMC – have averaged profit growth of over 15% for five years running. And last year? That number shot up to 33%.
On average, their stock price is up 70% over the last 12 months. It’s a gold rush and they’re the ones selling shovels.
…But then
If you’ve already invested in mutual funds before this frenzy, well, asset managers are making a killing in fees and they’re going to keep feeding off this boom.
Just don’t forget Dixena and Joseph’s warnings. The small-towners are likely to jump ship at the first sign of stormy weather and aren’t in it for the long term anyway. So don’t be the guy selling at the first sign of smoke. Stay calm and stick to your SIPs.
