WHY YOU MUST KEEP THE FOLIO STORY IN MIND
Folios or unique mutual fund investor accounts have a special place in mutual fund flow analysis. We normally tend to evaluate mutual funds in terms of monthly flows or the total AUM of the fund. While both are great talking points, it is the folios growth that actually serves as the long term story for mutual funds. Remember, mutual fund folios are not unique investors but just unique investor accounts. For instance, if an investor has mutual fund across 5 AMCs, then they would have 5 folios at the bare minimum. Folios can be consolidated at an AMC level but not across AMCs. However, there is a reason why folios are still relevant in the overall realm of mutual fund growth analysis.
You normally find a plethora of reporting in the press about the mutual fund AUM crossing ₹60 Trillion or getting close to ₹65 Trillion, as it did in July 2024. However, you would often find that there are two diverse trends in mutual fund AUM growth. For instance, the AUM growth in debt funds is purely cyclical as it depends on the vagaries of the treasury flows of corporates around the advance tax payment time. With interest rates so high, there is no clear debt market trend visible. When it comes to active equity funds, passive funds, and hybrid funds, much of the AUM accretion still comes from value accretion due to the equity indices rising higher and not from any broadening of the customer base. While folios may be duplicated at a customer level, they still show the investment infusion rather than market value. That is what makes the folios story special for mutual funds.
MF FOLIOS: MACRO PICTURE FOR JULY 2024
How does the macro picture of mutual fund folio growth look like in July 2024; across open-ended and close-ended funds?
| Macro picture | Total Folios Jul-24 | Total Folios Jul-23 | Folio Growth |
| Open ended Funds | 19,78,60,440 | 15,09,87,781 | 31.04% |
| Closed Ended and Interval Funds | 5,45,854 | 4,33,489 | 25.92% |
| Grand Total | 19,84,06,294 | 15,14,21,270 | 31.03% |
Data Source: AMFI
At a macro level, the total number of mutual fund folios as of July 2024 stood at 19.84 Crore folios; compared to 19.10 Crore folios in June 2024, 18.60 Crore folios in May 2024, 18.15 Crore folios in April, and 17.79 Crore folios in March 2024. Each month, the folios have steadily and progressively built momentum, which is a good sign and can be attributed to the proliferation of investors into SIPs and the NFOs. On a yoy basis, compared to July 2023, total folios are up at a robust 31.03%; compared to 28.11% in June 2024, 26.19% in May 2024, 23.94% in April, and 22.04% in March 2024. The traction on folios is progressively higher as is the yoy growth in folios eloquently demonstrates.
On yoy basis, it is not just the open ended folios, but even the closed ended folios have grown. However, it needs no reiteration that the closed ended folios have become quit insignificant in the largest scheme of things. Today, if you look at the macro picture, the close-ended folios are just about 0.28% of total mutual fund folios.
ACTIVE DEBT FUND FOLIOS AGAIN CONTRACT IN JULY 2024
Debt fund folios had been under pressure for the last few years due to a combination of quarterly treasury pressures, rising rates, lack of clarity on rate trajectory, and liquidity issues. It needs no reiteration that debt fund folios are corporate and hence, cyclical, in nature. Also, debt funds don’t rely too much on folios but rather on revenue per customer. With the rather ambivalent interest rate environment, investors gravitate towards the shorter end of the yield curve, and consciously avoid the longer end. For July 2024, active debt fund folios contracted by -3.33%, compared to -2.69% in June 2024, -1.40% in May 2024, and -0.83% in April 2024. The fall is getting sharper with each passing month.
| Active Debt Funds | Total Folios Jul-24 | Total Folios Jul-23 | Folio Growth |
| Long Duration Fund | 69,014 | 47,731 | 44.59% |
| Overnight Fund | 8,73,876 | 7,20,682 | 21.26% |
| Gilt Fund | 1,92,867 | 1,81,427 | 6.31% |
| Money Market Fund | 4,33,155 | 4,34,366 | -0.28% |
| Liquid Fund | 17,82,584 | 17,99,501 | -0.94% |
| Ultra Short Duration Fund | 6,32,446 | 6,47,116 | -2.27% |
| Dynamic Bond Fund | 2,16,166 | 2,32,024 | -6.83% |
| Medium to Long Duration Fund | 98,618 | 1,06,719 | -7.59% |
| Low Duration Fund | 8,43,900 | 9,33,671 | -9.61% |
| Floater Fund | 2,05,947 | 2,31,370 | -10.99% |
| Corporate Bond Fund | 5,38,313 | 6,08,834 | -11.58% |
| Short Duration Fund | 4,38,664 | 5,00,046 | -12.28% |
| Gilt Fund (10-Y Duration) | 36,301 | 41,832 | -13.22% |
| Medium Duration Fund | 2,17,360 | 2,53,075 | -14.11% |
| Banking and PSU Fund | 2,43,634 | 2,85,661 | -14.71% |
| Credit Risk Fund | 1,93,899 | 2,34,415 | -17.28% |
| Sub Total – Active Debt Funds | 70,16,744 | 72,58,470 | -3.33% |
Data Source: AMFI
What are the key takeaways from a yoy comparison of debt fund folios as of July 2024? Out of the 16 categories of debt funds as per AMFI classification, only 3 categories showed positive growth in folios. Even out of these 3 categories, only 2 categories had double-digit growth in folios, while gilt funds grew at just about 6.31% yoy. The ratio of contracting folios to expanding folios stands at 13:3, and has considerably worsened in the last few months, and this is one of the worst ratios seen in recent times. The leader in terms of folio growth was Long Duration Funds, which grew 44.54% yoy, albeit on a relatively smaller base. Overnight funds also grew folios at 21.26%, on a much larger base. Gilt funds was the only other category of debt funds to show positive growth in folios on a yoy basis.
In terms of folio contraction, it was the same list of standard suspects putting pressure on folio growth? Contraction in folios was pronounced across credit risk funds at -17.28%, banking & PSU funds -14.71%, medium duration funds at -14.11%, and gilt funds with 10-year constant duration also contracting folios by -13.22%. There were three more fund that saw double-digit contraction; short duration funds (-12.28%), corporate bond funds (-11.58%), and floater funds (-10.99%). Investors have shown an aversion for bonds where there is an element of discretion to the fund manager; and it could be the visible lag effect of the Templeton mutual fund fiasco of 2020. A lot will depend on how the Fed takes up the rate cut in September and whether the RBI follows suit. That could once again rekindle the interest of investors in debt funds, but for now, it is fairly low in the pecking order.
ACTIVE EQUITY FUNDS ADD 3.59 CRORE FOLIOS IN LAST 1 YEAR
While debt fund folio contraction showed a lot of ambivalence among investors, the vote was clearly retail positive for equity funds. In July 2024, active equity funds added 3.59 Crore folios compared to July 2023. For active equity funds, the yoy folio expansion for July 2024 improved further 35.01%; compared to 31.88% in June 2024, 29.63% in May 2024, 27.13% in April, and 24.96% in March. These folio additions have come about due to a combination of record SIP flows and robust NFOs across select equity fund categories.
| Active Equity Funds | Total Folios Jul-24 | Total Folios Jul-23 | Folio Growth |
| Sectoral/Thematic Funds | 2,47,86,304 | 1,35,65,765 | 82.71% |
| Multi Cap Fund | 73,64,238 | 44,53,227 | 65.37% |
| Small Cap Fund | 2,09,62,913 | 1,30,15,548 | 61.06% |
| Mid Cap Fund | 1,60,29,834 | 1,13,13,470 | 41.69% |
| Value Fund/Contra Fund | 70,16,092 | 50,53,888 | 38.83% |
| Dividend Yield Fund | 9,91,819 | 7,63,914 | 29.83% |
| Large & Mid Cap Fund | 1,00,77,659 | 80,81,426 | 24.70% |
| Flexi Cap Fund | 1,53,77,119 | 1,28,46,852 | 19.70% |
| Large Cap Fund | 1,43,57,880 | 1,29,65,360 | 10.74% |
| ELSS | 1,64,63,700 | 1,53,25,099 | 7.43% |
| Focused Fund | 50,71,314 | 52,01,169 | -2.50% |
| Sub Total – Active Equity Funds | 13,84,98,872 | 10,25,85,718 | 35.01% |
Data Source: AMFI
In July 2024, a total of 10 out of the 11 categories of equity funds as per AMFI classification saw accretion in folios. That is a strike rate of 91%; a figure that has been constant for the last 6 months now. The only equity fund category to see contraction in folios in July 2024 was focused funds, with folios shrinking by -2.50%. If you look at the big growth story, it was again dominated by folios growth of sectoral / thematic funds. They have been the biggest beneficiary of SIP and NFO flows in the last few months. In terms of folio growth, the sectoral / thematic funds were followed by multi-cap funds, small cap funds, mid-cap funds, and Contra Funds in that order. The revival in small caps shows genuine retail interest, which never really went away. You can scream from the rooftops about large caps being underpriced, but the markets have their own eccentricities.
The big growth stories in terms of equity fund folios were sectoral / thematic funds at 82.71%, multi-cap funds at 65.37%, small cap funds at 61.06%, Mid-Cap funds at 41.69%, and value / contra funds at 38.83%. The improved ranking of thematic funds started in May with the NFO of HDFC Manufacturing Fund, that raised ₹9,563 Crore. That trend of sectoral and thematic NFOs have continued in June and July also. In July, it was the NFO of ICICI Pru Energy Opportunities Fund that made a big difference to the sectoral folio growth. One interesting shift is from flexi cap funds to multi-cap funds; as evident in folio growth and also in the kind of investor interest that the Frankling Templeton Multi-Cap fund received for its NFO. It looks investors prefer a more rule-based approach to combination investing; rather than 100% discretion to the fund manager. Overall, equity fund folios grew by 35.01% in July 2024; with SIPs at record levels and NFOs at a robust ₹16,565 Crore.
HYBRID FUNDS ENCORE – 100% STRIKE RATE IN FOLIO GROWTH
We have combined hybrid funds and solution-based funds due to their similar profile. Folios have grown across hybrid categories with 100% strike rate of positive folio growth. While multi-asset allocation funds lead the show, other allocation funds are also seeing traction.
| Hybrid / Solution Funds | Total Folios Jul-24 | Total Folios Jul-23 | Folio Growth |
| Multi Asset Allocation Fund | 24,26,363 | 11,78,713 | 105.85% |
| Arbitrage Fund | 5,32,819 | 4,38,865 | 21.41% |
| Equity Savings Fund | 4,31,125 | 3,66,513 | 17.63% |
| Dynamic Asset Allocation/BAF | 47,70,961 | 44,43,098 | 7.38% |
| Retirement Fund | 29,36,417 | 27,82,143 | 5.55% |
| Conservative Hybrid Fund | 5,45,408 | 5,23,207 | 4.24% |
| Aggressive Hybrid Fund | 55,18,271 | 52,99,241 | 4.13% |
| Children’s Fund | 30,02,653 | 29,36,379 | 2.26% |
| Sub Total – Hybrid Funds | 2,01,64,017 | 1,79,68,159 | 12.22% |
Data Source: AMFI
All the 8 categories of hybrid funds plus solution funds saw folio expansion in July 2024; with 3 out of these 8 reporting double-digit growth in folios. The best folio growth was seen, once again, in multi asset allocation funds at 105.85% yoy and this comes on a fairly large base. Arbitrage funds are emerging as an option to liquid funds in HNI portfolios and these saw folios growth of 21.41% yoy. The other allocation segment of equity savings funds also saw investor folios growing by 17.63% yoy. Investors are seriously looking at hybrids like multiple asset allocation funds, BAFs and equity savings funds for allocation across multiple asset class with tactical management. However, this is not just about the asset allocation but also about the tax treatment of these hybrid funds post the budget. These multi-cap and equity savings funds structure their portfolio in such a way that they get classified as equity funds due to holding over 65% in equities. This enhances post-tax returns for investors.
Other than the multi asset allocation funds, equity savings funds and arbitrage funds; all the other categories of hybrids only showed single digit growth. Balanced Advantage Funds (BAFs), which enjoys the highest AUM among hybrid funds, has been slow on folio growth at 7.38% with Retirement funds also growing at 5.55% on the back of the recent NFO. For hybrid category funds, number of folios grew by 12.22% in July 2024, compared to 11.53% in June 2024, 10.58% in May 2024, and 9.54% in April. The yoy growth in hybrid fund folios has been progressively getting better each month and that is the good news.
PASSIVE FUNDS STILL THE BEST ON YOY FOLIO GROWTH
Passive funds added 90.05 Lakh folios yoy. Passive category includes equity and debt related index products (index funds and ETFs), apart from gold funds, gold ETFs, silver ETFs, and Fund of Funds (FOF).
| Passive Funds | Total Folios Jul-24 | Total Folios Jul-23 | Folio Growth |
| Index Funds | 97,35,676 | 48,14,292 | 102.22% |
| Other ETFs | 1,54,90,196 | 1,22,12,329 | 26.84% |
| GOLD ETF | 55,27,649 | 47,74,760 | 15.77% |
| Fund of funds investing overseas | 14,27,286 | 13,74,053 | 3.87% |
| Sub Total – Passive Funds | 3,21,80,807 | 2,31,75,434 | 38.86% |
Data Source: AMFI
Other than hybrid funds, even passive funds saw expansion in folios across all categories, although the yoy folio growth of passive funds is even better than that of active equity funds. The growth in YOY folios of passive funds is the highest among all categories at 38.86%. The Index funds dominated folio growth at 102.22%, followed by index ETFs at 26.84%, and gold ETFs at 15.77% in July 2024. Passive fund folio growth in June 2024 improved further to 38.86%; compared to 34.24% in June 2024, 32.40% in May 2024, 29.56% in April, 27.57% in March, and 26.68% in February. Once again, folios growth is getting progressively better and that is what really matters in terms of long term sustainable growth of passive funds. Passive funds are making a comeback as active ennui sets in.
What are the takeaways from folio growth story in July 2024? Clearly, the financialization of savings is the big trend, but the trend for passives are back in a big way and they are getting the better of active equity funds. The only question is when will debt funds get a new narrative; and for that we may still have to wait for the Fed meeting in September and the next RBI MPC meeting in October 2024.
