Sector Update | 27 September 2024
Sector Update | Financials
Financials – Non Lending
Indian AMCs
AUM Mix
Aug'24
Debt
Liquid
Equity
Index funds
ETFs
Others
Total AUM (INRt)
13.2%
11.7%
57.7%
3.9%
11.7%
1.7%
66.0
Rate cuts to boost flows in longer-duration funds
Positive for AMCs’ profitability
Debt AUM Inflows (INRb)
FY24 YTD FY25
Overnight
Ultra Short Dur
Low Dur
Short Dur
Medium Dur
Med to Long Dur
Long Dur
Gilt
Others
-412.0
-21.6
-35.6
4.3
-30.9
8.0
30.0
43.5
-206.9
222.5
193.3
119.3
83.3
-17.4
3.8
31.1
66.5
-50.5
Over the past couple of years, AUM of the MF industry has recorded a 29% CAGR
driven by strong growth across categories except the Debt segment, which grew at a
modest pace of 2.9%. Equity/Hybrid/Liquid/ETFs have reported a 41%/33%/20%/ 31%
CAGR over the same period.
Since achieving an all-time high of INR11t in Jan’21, the AUM of debt-oriented
schemes declined to reach INR7.7t in Mar’23. The decline was led by ~250bp hike in
interest rates during the same period and the scrapping of indexation benefits for
taxation. Nevertheless, with rate cut expectations round the corner, recent trends are
indicating increased traction in inflows.
While investments in liquid schemes maintain their momentum, longer-duration
schemes (1-10 years) witnessed significant outflows during FY22-FY23. In FY24, the
trends reversed with modest inflows, and in FY25 the momentum seems to have
picked up.
The US Fed rate cut in Sep’24 after four years may signal the start of declining RBI repo
rates in the near future. This would improve the attractiveness of the longer-duration
schemes for investors, aided by likely capital appreciation gains and improved yields.
After the commencement of the RBI repo rate cuts in Jan’19, in one-year, the returns of
the long-duration schemes and Gilt were at an all-time high of 14.4% and 13.4% in Jan’20.
As the AUM mix in the debt segment tilts towards longer duration funds, the yield on
debt AUMs is likely to improve for AMCs. This could partially cushion the impact of the
telescopic structure on equity yields.
Debt-oriented schemes facing challenges
While the spotlight on equity schemes remains constant, debt-oriented schemes’
growth has been tepid, with debt fund AUM at INR8.7t (as of Aug’24) reporting a
two-year CAGR of 3% vs. 39% for equity schemes. However, the segment has gained
traction recently, reflected in net inflows in four of the last five months.
During the past couple of years, the rising interest rate environment translated
into an increase in interest rates on fixed deposits, making them a compelling
investment avenue vs. debt mutual funds. Most banks are offering attractive
interest rates in the range of 6.6-8.5% for FDs of 9-36 months.
The previous interest rate cut cycle (Jan’19-May’20 repo rate cut of 250bp), led
to ~2x+ growth of debt AUM in Mar’20/Mar’21 vs. growth of bank deposits. The
RBI rate hike in Apr’22, after stable repo rates for two years, led to a 12%/17%
YoY decline in the AUM of debt-oriented schemes in Mar’22/Mar’23, while bank
deposits grew ~10% YoY during both time periods. While there have been
inflows in debt-oriented schemes in FY24 as well as in FY25YTD, AUM growth
remains below the deposit growth trajectory.
The Union budget 2023 scrapped the indexation benefits available on the long-
term gains generated from debt mutual funds, and the same will now be taxed
as per the investor’s tax slab. This removed the tax-related advantage of debt
schemes over FDs, making it less attractive.
Research Analyst: Prayesh Jain
(Prayesh.Jain@MotilalOswal.com)
/ Nitin Aggarwal
(Nitin.Aggarwal@MotilalOswal.com)
Research Analyst: Muskan Chopra
(Muskan.Chopra@MotilalOswal.com)
/ Kartikeya Mohata
(Kartikeya.Mohata@MotilalOswal.com)
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
27 September 2024
Investors are advised to refer through important disclosures made at the last page of the Research Report.
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