The rise and rise of mutual funds

It is curious that the cake cutting and champagne popping that accompanied the Nifty's new lifetime high in recent weeks, was not in evidence when the mutual fund industry topped Rs. 50 lakh crore in assets.

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Mutual funds have created more durable wealth for Indian retail investors and within a shorter time frame, than direct stock investments. Yet, the contribution of this vehicle to wealth creation and the change in household savings habits seems underappreciated.

Wealth Effect

Assets of the Indian mutual fund industry stood at Rs. 50.7 lakh crore in end December 2023, data from the Association of Mutual Funds of India shows.

About 59 per cent of this belonged to individual investors, taking their wealth parked with mutual funds to Rs. 30 lakh crore. This is neckandneck with the money held by individual investors in stocks, which Prime InfoBase pegs at about Rs. 30.4 lakh crore in September 30, 2023.

This is a significant milestone because mutual funds made their debut only in in the mideighties (not counting the erstwhile UTI) in India, while stock exchanges have been around since 1875.

In the 10 years from September 2013 to September 2023, the value of individuals' stock market holdings zoomed from Rs. 4.75lakh crore to Rs. 30.4lakh crore. But the value of their MF holdings has expanded faster from Rs. 3.8lakh crore to Rs. 30lakh crore.

This double engine growth in the two assets in the last 10 years is likely to have unleashed a substantial wealth effect for Indian households.

This could provide one explanation for affluent households in India splurging on premium goods and services and going on a borrowing binge, despite snailpaced income growth. Official RBI data on household savings in stocks and mutual funds at less than 1 per cent of GDP tends to underplay the wealth effect, because it captures only inflows into these assets at cost.

Lure of Market Returns