What the rising share of small cities in mutual funds assets under management means

Categorised as ‘Other cities’ by the Association of Mutual Funds in India, these are a group that fall beyond the top 110 cities across the country (in terms of contribution of the industry AUM). These cities account for 17.44 per cent of the industry AUM, i.e Rs 6.87 lakh crore out of the aggregate industry AUM of Rs 39.42 lakh crore, as of March 2023. Their share has risen sharply from 10.99 per cent in March 2020 and from a low of 2.55 per cent in June 2014.

How has the equation changed?

As these smallest cities increased their weight in mutual fund investment over the past three years, not only have they eaten into the share of the large metros (share of top 5 cities came down from 62.4 per cent to 54.5 per cent), they have also stabilised the flow of funds for the fund houses when the market movement is adverse.

In fact, while the share of top 35 cities came down from 80 per cent in March 2020 to 72.3 per cent in March 2023; the share of the next 75 cities rose from 5.37 per cent to 6.23 per cent in the same period. Their share in June 2014 stood at 5.23 per cent.

However, the biggest change came at the bottom of the pyramid in the ‘Other cities’ – semi-urban and rural areas. Individually, they are contributing 0.01-0.03 per cent of the industry AUM or even lower, but together have created a big change.

What does it mean?

Many within the industry feel this is an indication of the deepening of Indian equity markets, and also a reflection of the democratisation of equity culture in the country. While it tells the story of an aspirational India looking for higher returns on their investments and a better future, it also shows the faith and confidence that the small investor in the smaller towns has on the steps taken by the regulator to protect investor interest. Besides, this is a result of the paradigm shift in the ease of investment over the past few years.

While investing in equities does carry some risk, especially if the investment is for the short-term, the positives are many — from contributing to the India growth story to higher long-term return on investments. Fund houses say that SIP investors from smaller cities are more diligent about their monthly SIPs and the flows do not stop with markets witnessing adverse movement.

Why should MFs be part of every investor’s portfolio?

Many investors are often anxious about investing in the best performing scheme. It is, however, more important to start early and go with a decently performing fund than to stay away. For example, over the past 10 ten years, in the large cap category, while the top performing fund generated a compounded annual return of around 14 per cent, many others generated a return of around 12 per cent. The idea must be to beat the returns generated by conventional saving instruments (fixed deposits and small saving schemes) and inflation. In the above case, even the average fund that generated around 12 per cent would have outperformed the returns from fixed deposits by around two times.

Investors must also understand that the benefit of compounding is significant over a long period of time.

For example, if two individuals are investing Rs 10,000 a month for 20 years, there would be a big difference in their corpus depending upon where they invest at the end of the 20 years. While at 6 per cent, in a conventional saving instrument, an investor would end up with a corpus of Rs 46.2 lakh, the other investor, getting 10 per cent CAGR on his equity fund investment over the 20-year period, would see his corpus rise to Rs 75.9 lakh.