India investors embrace equities in shift beyond traditional assets

Growing numbers of Indian citizens are getting into the habit of making monthly investments in equity-focused mutual funds, moving beyond the population's traditional focus on real estate, gold and bank deposits.

The trend is being driven by a cocktail of factors, including a savvy public relations campaign spearheaded by the Mumbai-based Association of Mutual Funds in India — playing up the charms of dollar-cost averaging — as well as tectonic government-driven shifts in the proportion of Indians with bank accounts.

Market veterans say that growing wave of monthly inflows could provide a boost for an Indian asset management industry that's seen only the biggest management firms consistently reporting profits.

AMFI's website shows contributions to systematic investment plans — which more than 25 million individuals have tapped into to make monthly investments in mutual funds — came to roughly 80 billion rupees ($1.1 billion) in November, up 35% from November 2017 and 106% from two years before.

A further sign that the decades-old offering is gaining traction now: SIPs accounted for 47% of the record 16 million mutual fund accounts opened during the fiscal year ended March 2018, according to a report earlier this year by Mumbai-based CRISIL Ltd., a leading local ratings house and an affiliate of S&P Global Inc.

Those numbers reflect the "great momentum" SIPs have enjoyed in recent years, and point to continued strong prospects, said N.S. Venkatesh, AMFI's chief executive, in an interview.

"SIPs have easily become the ($350 billion fund industry's) biggest product," with yearly inflows approaching 10% of the roughly $140 billion in equity assets under management, said Anthony Heredia, CEO of Mumbai-based Baroda Asset Management India Ltd.

If India's macroeconomic momentum remains on track and the shift to financial assets from real estate and gold continues, the long-predicted narrowing of the gap of mutual funds as a percentage of household assets between India and developed markets such as the U.S. could finally happen, Mr. Heredia said.

Market veterans point to the demonetization campaign India's government announced in November 2016 — removing the 1,000-rupee bills from circulation that had allowed a big chunk of real estate and gold transactions to take place outside of the banking system — as a major factor shifting household assets to financial accounts from those sectors.

Generational change, in an Indian population marked by a relatively young median age of less than 27, is another big factor in play now, market watchers said.

Sanjay Sapre, president of Mumbai-based Franklin Templeton Asset Management (India) Pvt. Ltd., said that in contrast to the financial lessons he learned at his father's knee — that real estate, gold and bank accounts could be counted on while stocks and bonds were too hot to handle — "this generation is growing up with mutual funds."

SIPs have become more of a consumer product with a compelling story line — that consistent contributions over time will lead to good financial outcomes, agreed Baroda's Mr. Heredia.

By way of example, Mr. Sapre noted in an interview that an estimated 9% to 10% of industry flows into SIPs are coming from individuals choosing funds without the help of an adviser.

Franklin Templeton India had average assets under management of $15.2 billion in the quarter ended Sept. 30. A spokesman for the firm declined to break out the figures for SIPs.

Sundeep Sikka, executive director and CEO of Mumbai-based Reliance Nippon Life Asset Management Ltd., said in an interview his firm's focus on SIPs is likewise driven, in part, by the growing willingness of younger Indians to invest in funds. "For them, mutual funds are going to be their first stop," he predicted. Reliance Nippon Life has $63 billion in total AUM.

Market veterans said the growing embrace by India's populace of dollar-cost averaging, or rupee-cost averaging, offers both short-term and longer-term benefits for the country's asset management industry.

For the current year, the strong pickup in inflows from domestic investors has more than offset net outflows from foreign investors, noted Brijesh Ved, head of equities, portfolio management services and offshore advisory with Mumbai-based BNP Paribas Asset Management India Pvt. Ltd. BNP has $1.5 billion in India AUM. The firm declined to break out SIP figures.

Longer term, the habit of making regular infusions into mutual funds could open the door for the provision of retirement savings for a growing portion of India's population.

Mr. Sikka said the focus on SIPs at his firm — which has seen its ranks of clients making monthly investments to equity funds swell to 3 million now, with annualized inflows of $1.5 billion, from 2.1 million investors a year ago and 1.6 million two years ago — helps promote "the financial inclusion of India, a country which doesn't have a (developed) social security system." About 90% of India's population isn't covered by a pension safety net, noted Mr. Sikka.

A recent decision by India's largest pension scheme, the $140 billion Employees' Provident Fund Organization, to start investing 15% of its incremental inflows in equity exchange-traded funds, including Reliance Nippon Life ETFs, is a further signal to the public that "equity is an important asset class for wealth creation," said Mr. Sikka.

While SIPs in recent years thrived in an environment where Indian equities were rallying while real estate and gold prices were weakening, some market watchers see signs that the growing embrace of dollar-cost averaging is more structural than cyclical.

For example, combined inflows into SIPs have held up well in recent months despite a bout of turbulence that saw India's S&P BSE Sensex benchmark index tumble 14% over the span of 60 days through late October.

That suggests considerable resilience and commitment to disciplined investing over the long term, said Navneet Munot, chief investment officer of Mumbai-based SBI Funds Management Private Ltd.

Mr. Munot said SBI's SIP business currently serves roughly 4 million investors, more than double the 1.5 million it was serving two years ago, with monthly flows up to 10 billion rupees — coming out to $1.7 billion a year — from 4 billion rupees two years ago.

The rise of dollar-cost averaging, in predominantly equity-linked products offering fees of between 1% and 2%, could prove a salve for a money management industry where executives say fewer than a quarter of the 44 money managers now registered with the Securities and Exchange Board of India are profitable and the top 10 managers control 80% of industry AUM.

That competitive backdrop has tested the devotion of leading foreign managers to the Indian market.

In May, BlackRock Inc. became the latest foreign money manager to quit the Indian mutual fund market, agreeing to sell the 40% stake it took a decade ago in DSP BlackRock Investment Managers — which had about $13 billion in AUM at the end of 2017 — to its partner, DSP Group.

BlackRock executives said the firm remains committed to investing in India but market veterans in Mumbai, who declined to be named, said under the terms of the firm's partnership with DSP, BlackRock can't re-enter the local mutual fund market on its own for three years after the breakup. A BlackRock spokesman declined to comment.

Other managers including DWS Group GmbH & Co., Nomura Asset Management Co., Goldman Sachs Asset Management LP, Morgan Stanley Investment Management and PineBridge Investments LLC sold their operations in India between late 2014 and 2016, before the recent signs of a blossoming equity culture in India became apparent.

However, the country's institutional market — with only a handful of sizable retirement pools, including the Employees' Provident Fund Organization and the $35 billion National Pension Scheme, both based in New Delhi — remains a thin reed for money managers looking to build profitable businesses.

India's New Delhi-based Pension Fund Regulatory and Development Authority, which oversees the NPS, pegs the level of fees paid to managers at roughly 1 basis point, while the EPFO has reportedly hired managers for less than 1 basis point.

India, while it has a reputation for intensive regulation at the micro-level, is in urgent need of a top-down effort to foster the asset management industry as a crucial national interest, in line with what neighboring China is doing, said SBI's Mr. Munot.

Big institutional investors in India are able to retain top money managers now at rock-bottom fees but "the economics need to get corrected at some point" to facilitate the development an asset management industry capable of allocating the billions upon billions of dollars India needs to build out its infrastructure in coming years, said Mr. Munot, adding "time is running out to think seriously about this challenge."