Over 50% of new mutual fund investors now come from smaller cities: Zerodha Fund House Study

A recent study by Zerodha Fund House highlights a significant shift in the mutual fund industry's investor base, with more than 50 per cent of new investors now coming from smaller cities,  also known as B-30 cities (beyond the top 30 cities). 

From April to August 2024, the mutual fund industry added 2.3 crore investors (folios), with over half of them, 1.23 crore (55 per cent), hailing from these smaller urban centres. This growing participation from B-30 cities is expected to contribute to long-term industry growth and promote a culture of saving and investing across the country, said the fund house.

However, it pointed out that despite the increasing number of investors from smaller cities, these regions still account for just 19 per cent of the total Assets Under Management (AUM) of the mutual fund industry. This gap suggests that while participation is rising, the average investment size from smaller cities remains lower compared to the more prominent urban centres. 

Vishal Jain, CEO of Zerodha Fund House, commented on this trend, stating that the shift could lead to broader financial inclusion and improved long-term prospects for investors in these regions.

Investment Sizes: A Comparison

According to the fund house, while the number of investors from smaller cities is rising rapidly, the average ticket size of investments remains relatively lower than in the top 30 cities (T-30). The average retail investment size from smaller cities stands at ₹1.13 lakh, compared to ₹2.04 lakh for the combined T-30 and B-30 cities. This difference underscores the potential for growth in investment sizes as more financial literacy and economic prosperity reach these regions.

Factors Driving Growth in Smaller Cities

The increased participation from B-30 cities can be attributed to several key factors, including:

Rising SIP Contributions: Systematic Investment Plans (SIPs) have gained significant traction in smaller cities. As of August 2024, 54 per cent of all SIP accounts in the mutual fund industry were from smaller cities, noted the fund house. These accounts reflect the growing penetration of mutual fund investments in less urbanized areas. From April to August 2024, SIP accounts from B-30 cities saw a robust growth rate of 18.7 per cent for index funds, the highest growth rate among any category within the mutual fund industry, it further informed.

Moreover, 79 per cent of SIP accounts from smaller cities are directed toward growth/equity-oriented schemes, showcasing the preference for higher-risk, higher-reward investment options among investors from these regions. This reflects an increasing appetite for wealth creation through equities rather than traditional savings instruments, added Zerodha.

Access to Direct Plans: The fund house also observed that the rise of digital platforms has played a pivotal role in facilitating investments from smaller cities. With smartphone apps, direct investment platforms, and digital payment systems becoming more accessible, over 50 per cent of new investors from B-30 cities now invest through direct plans, bypassing intermediaries. 

From April to August, the number of investors from smaller cities rose from 8.29 crore to 9.52 crore. Meanwhile, the number of investors investing through Direct Plans increased from 2.96 crore in April 2024 to 3.6 crore in August 2024. Of the 1.23 crore new investors from smaller cities, 0.64 crore or 52 per cent invested through Direct plans, it added. This shift not only makes investing easier and more transparent but also reduces costs for investors, encouraging further participation.

CEO’s Perspective

Vishal Jain expressed optimism about the future of mutual fund investments in smaller cities. He noted, "I strongly believe that simple, transparent, and affordable products will help individual investors design better financial futures. Index-based products exhibit all these qualities, and I’m heartened to see their growing trend in smaller cities and towns."

Jain emphasised that the rise of index funds and SIPs in B-30 cities reflects the broader appeal of straightforward investment products that offer lower costs and greater transparency. This trend aligns with the broader movement toward financial literacy and inclusion across India's diverse population.

The increasing participation from smaller cities in India's mutual fund industry marks a significant development in the country's financial landscape. While B-30 cities still contribute a smaller share of the overall AUM, the rapid growth in investor numbers, coupled with the rise of SIPs and direct plans, indicates that the mutual fund industry is successfully reaching new markets. As financial inclusion continues to expand, it is expected that both the number of investors and the average investment size from these regions will grow, contributing to a more robust and diverse investor base in India.