Savings

Your Money: Need a Debt Savings Plan Now

By Joydeep Sen

When we discuss mutual fund categories, we discuss performance metrics, amount of funds under management, investment logic, and future expectations. Today, let’s talk about another point of view. And that is to say the number of investors served by the different categories of funds.

As we do not have data on the exact number of investors, we will take the number of folios as an approximation. There are 13.6 crore folios in the MF industry, and just over 3 crore unique investors. This ratio of approximately 3:13 gives you an indication of the number of investors corresponding to the number of folios in a category.

Popularity of ELSS
Of the many fund categories served by the MF industry, the most popular, in terms of number of folios, is the Equity-Linked Savings Scheme (ELSS). At the end of August 2022, there were up to 1.43 crore folios in ELSS. The reason is obvious: it is a tax planning tool, under Section 80C of the Income Tax Act. It offers equity-linked growth over an adequate horizon. This attracts many investors. The most popular category is followed by large caps with 1.28 crore folios, sector/thematics with 1.25 crore folios and flexi-cap with 1.23 crore. Debt funds do not have as many folios as assets under management (AUM) include institutional or corporate investors, where the quantum in a folio is higher.

AUM in funds
The highest AUM is for liquid funds – 4.2 trillion rupees – as it includes corporate investors. Next come large-cap and flexi-cap funds, with just under Rs 2.4 trillion in each of these categories. ELSS funds have a decent amount, around $1.5 trillion. For a perspective, the AUM of the industry is Rs 39.5 trillion.

Also Read: Investing Smart: Build an Inflation-Proof Portfolio

Now that we know that ELSS funds appeal to the greatest number of investors, it is interesting to see the performance of this category.

Fund performance
We will look at the average basket returns to represent the performance of this fund category. Data refer to regular, ie non-direct, diets. Until October 6, 2022, the average one-year return of the ELSS is 0.14%, the last three years are 18.2% annualized, the five years are 11.1% annualized and the 10 years are 14.6% annualized. And yes, those are good numbers. ELSS funds outperformed large-cap and flexi-cap funds.

Through October 6, 2022, large cap funds generated -1.6% last year, 15.4% last three years annualized, 10.6% last five years annualized and 12.7% over the past ten years annualized. Over the same periods, flexi-cap funds delivered, on basket average, minus 0.4%, 17.9%, 11.5% and 14% respectively. Therefore, ELSS funds, serving more investors, have been beneficial to them.

This does not mean that ELSS was the best performing category. Mid and small cap funds outperformed ELSS. During the periods mentioned above, mid-cap funds delivered 4%, 25.5%, 13.2% and 18%, respectively, on an annualized basis. For small cap funds, the returns are 5.1%, 32.1%, 14.3% and 18.9% over the periods, respectively.
In terms of number of folios, in addition to the usual equity-focused fund categories mentioned above, ETFs are growing in popularity. Along with the spread of the digital mode and the number of demat accounts crossing 10 crore, ETFs now have 1.15 crore folios. However, this number is found in several fund descriptions. ETFs are primarily equity-focused funds that track an index, but there are a few debt-focused ETFs.

Conclusion
Mutual funds are for the masses, even though companies are investing. In assessing the relative importance of a fund category, while AUM is paramount, the number of people served is also important. The popularity of ELSS shows that the combination of tax benefits and decent performance works well. From this point of view, there is also a case for the Debt-Linked Savings Scheme, with defined parameters on duration and credit risk.

The writer is a corporate trainer and author