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The mainstreaming of equity fund investments

Recent data trends show that equity mutual fund investments among individual investors have entered a new phase

For the first time ever, authentic data about exactly how widespread mutual fund ownership is in India are becoming available, and the numbers are remarkably encouraging. The picture that the data paint is one of an asset class that has finally come off age and is having a serious impact on the lives of a significant numbers of savers, as well as on the equity markets.

For years, it'd been generally hard to figure out exactly how widespread was the use of mutual funds in India. The figure that was always available was the number of folios or customer accounts. Of course, these were prone to large scale duplication as it was common for investors to make each investment under a new folio number. This has changed with the advent of the new 'Know Your Customer' (KYC) norms. The KYC process ensures that investor data is deduplicated by PAN numbers, thus giving what is a highly accurate count of the actual number of investors.

The data show that in the first eight months of the current financial year, 35 lakh new PAN numbers were added to the count of mutual fund investors. Moreover, the total number of PAN numbers under which investments have been made have reached 1.7 crore. In the last eight months, not only have 35 lakh new investors started investing in mutual funds, some 27 lakh invested in equity funds. It is notable that corporate investors have negligible investments in equity funds. These 27 lakh investors are almost all individual investors.

These numbers reinforce the fact that something fundamental has changed in equity mutual fund investments by individuals. Earlier, there were periods when mutual fund ownership grew sharply, but these were often near the top of bull runs when hot money came in, only to be disappointed and learn the wrong lessons about investing. This time, it's different. This period has seen the equity markets stagnant with short bursts of volatility.

The best part is that the increase in the number of investors are reflected in very substantial inflow of funds. Data from the industry body Association of Mutual Funds of India (AMFI) show that equity, balanced (counting the equity portion alone), tax-saving funds and equity ETFs together netted over ₹1 lakh crore in new equity flows during the 12 months ended September 2015. Let's put this number in perspective. Until recently the bull market of 2007-08 was a sort of gold standard for the fund industry, with distributors, sales staff and fund CEOs looking back fondly at that year as the period when equities topped the popularity charts. In March 2008, when equity funds were raking in the moolah, the annual net inflows into these funds were ₹43,900 crore. However, the net inflows in the last one year are more than twice that level, at ₹96,062 crore.

The important question is, what has changed now? Why, after half a century of existence, has equity fund ownership among individual investors suddenly taken off? It's said that success has many fathers while failure is an orphan. In this case, that might legitimately be true. There are a steadily increasing number of people who invest systematically and have built up a track record of good returns. The fund industry, investment media and advisors have come around to intensively promoting the SIP style of investments which produces results and binds customers to fund investing.

Another crucial factor has been the so-called B15 rule that SEBI brought in in 2013. Since that time, fund companies can earn more if they get an increasing proportion of their investments from towns and cities beyond the largest ones. That's a huge unmet need which has now been incentivised as a result of this regulatory change. Apparently, almost half of fresh investors come from the smaller cities now, and since the beginning of the year, the number has been more than half.

All this has added up to inflows that are qualitatively different. They have set the stage for a larger and larger set of investors earning good long-term returns, as well as equity market inflows that are an important counterweight to relatively more fickle flows from foreign investors. As the NPS equity assets build, and (hopefully) the EPFO stays on board, we'll truly be heading for a situation where ordinary small Indian investors are reaping the rewards of equity investments.