12 Jul 2022
by Nilesh Shah (Group President & Managing Director, Kotak Mahindra Asset Management Co.)
The mutual fund industry in India is one of the fastest-growing within the financial sectors in the country. And yet, we lag behind most countries if one were to compare the assets under management or AUM, as a percentage of GDP.
India’s AUM is just 12% of the country’s GDP, as compared to the global average of about 63%.
This relatively low penetration of mutual funds offers an excellent opportunity and potential for household savings to be channelled into productive investments.
According to global reports, India's asset management market is expected to grow at a compounded annual growth rate of about 14% over five years. Notably, investors from tier II and tier III cities have increased their investments significantly, contributing to the country's substantial growth of individual investor assets. These developments speak volumes about an economy traditionally characterized by a high savings attitude. It is encouraging that these trends are being sustained since the economy has only just begun to fully recover after the COVID-19 pandemic and is facing global headwinds.
So, let's examine what a deeper MF penetration would mean for the economy and the ordinary man.
Would an increase in MF investments in India neutralize the impact of the COVID-19 pandemic and global headwinds on the Indian economy?
Mutual funds help channel financial savings into investments. The COVID-19 pandemic and its consequent effects, among others, have had two major outcomes – a slowdown in economic growth globally, and a spike in inflation.
Higher investments in mutual funds lead to a growth in the AUM of fund houses; and while this cannot impact inflation directly, it can give higher returns and higher income to investors, which can help them beat inflation.
This means that consumers will have purchasing power despite inflation, which will ensure that the pace of economic growth does not slow down. In a way, economic growth is shielded from the impact of high crude oil prices, high food prices and the pandemic.
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