Large structural growth opportunity in Indian mutual funds: Citi Research

There is a large structural growth opportunity in the Indian mutual fund industry, say analysts at Citi Research. In a note to investors titled, “Long runway to grow, resilience to disruption,” they point out that the Indian Mutual Fund AUM / GDP ratio currently stands at 12% vis a vis the global average of 60%. Other countries have seen a greater than 15% CAGR over 10 years after reaching this penetration, believe the analysts.

Analysts at the brokerage house have examined the growth seen in MF AUM in other markets, both developed and emerging, after they touched a similar penetration level, i.e. of 10-12% AUM / GDP. Most countries saw >15% AUM CAGR over the next 10 years, 2-4x of the CAGR observed in nominal GDP.

For example Australia saw its AUM grow by 36% CAGR from 1996-2006, South Africa by 24% and Malaysia by 19% from 2000-2010 and USA by 20% from 1990-2000.

Assets under management of the mutual fund industry have seen a 14% CAGR over 10 years to Mar ’20 and penetration as a % of GDP has risen gradually to 10.9%. The brokerage house believes the recent market correction in Mar ’20 understates these – as on Mar ’19, the 10Y CAGR was 19% and penetration 12.5%. By either measure, India is significantly below the global average of 63% and also below several EM countries.

They point out that currently less than 2% Indians invest in mutual funds. MFs are just 3% of gross household financial savings and are gaining share from bank deposits. SIPs have been a great innovation with flows holding up well in high volatility and reflect rising investor awareness.