How the internet is boosting mutual fund returns?

Remember flipping through heavy prospectuses and visiting bank managers in stuffy suits just to invest in mutual funds?

What about now?? Just a few clicks and KYC formalities, there you go! 

It’s done! 

Investing in today’s digital era is easier than ever before! All thanks to the accessible internet. In the case of India, the average cost of 1GB of mobile internet data is among the lowest globally, at just Rs 13.98. In 2022, India had the fifth cheapest price for 1GB of data.

Today’s newsletter, we will discuss how the internet and fintech are changing the game for the economies and mutual funds, and how you can understand this exciting trend to grow your wealth.

As per the statistics, India’s internet users are growing more than other countries worldwide.  According to a recent study by Analytics Insight, internet usage in India is expected to reach 100 crores by 2025. This surge in internet connectivity is creating a wealth of new opportunities for businesses and individuals alike. 

India's Internet penetration has crossed the 80 crore mark in 2023, reaching a total of 82 crore active users, indicating that over 55 per cent of the population accessed the Internet during the previous year. 

Internet penetration increased by 8% year-on-year (YoY) nationwide, with rural India contributing over 53% of the total user base, amounting to 44.2 crore users and counting. 

This growth is possible because of many factors, including government initiatives, increased literacy about digital payments, and incentives for using digital payment methods.

Due to the high internet adoption rate in India and the evolution of financial services, investing is easier than before. Mutual funds are one of the best and most preferred ways of starting an investment journey. As per the BankBazar Survey, 57% of Indians prefer to invest in mutual funds. 

Digitalization Makes Mutual Funds Easier

The internet and digital transformation are impacting the economy in several ways, which can indirectly benefit mutual funds that invest in growing companies. 

Here are five key ways-

1. Democratizing Investment Opportunities-  The internet has broken down geographical barriers. People in remote villages can now access investment platforms and invest in mutual funds just like those in big cities. A recent National Stock Exchange (NSE) report shows a massive jump - a whole 52% increase! - in the number of retail investors from Tier 2 and 3 cities in 2023 showcasing their appetite to invest in mutual funds.

   This resulted in new demand and new inflows in the market.

2. Faster Transactions with UPI-  Payments made via UPI increased by 80% over the previous fiscal year. In the first quarter of FY 2023–24, transaction volume reached 24.9 billion and transaction value reached INR 39.7 trillion. This faster movement of money increases the velocity of money in the economy. 

   Velocity refers to how often money changes hands within a specific period. Higher velocity can stimulate economic activity, leading to increased company profits and benefiting mutual funds. Additionally, bringing more people into the formal financial system through UPI can improve tax collection.

   There was a time when we used to debate about the shift from an informal economy to a formal economy. UPI is the primary indicator of such a shift because people now even pay Rs. 20 via UPI.

3. Reduced Tax Burden (Indirect Impact)- While increased tax revenue doesn't directly translate to lower individual taxes, it can provide the government with more resources.  

   According to the Ministry of Finance, government tax revenue has grown by 18.74% year-over-year. This can be used to invest in infrastructure projects. Improved infrastructure can lead to a more stable and prosperous business environment, as reflected by a positive PMI (It stands at 56.9 in February 2024 from 56.7 in the preliminary reading). This overall economic growth can benefit companies, leading to higher returns for mutual funds that hold those companies' shares.

4. Increased Demand due to Internet Consumption- The Internet encourages online shopping and entertainment, leading to leisure and entertainment spending. This increased consumer demand can benefit companies in these sectors, potentially impacting the stock market and mutual fund returns. 

   The Internet has given rise whole new set of consumption spend:

   • Hotstar/Netflix

   • Zomato/Swiggy

   • Nykka

   • Glamping/Camping/Unique stays/Airbnb

   • Ola/Uber

5. Reduced Tax Arbitrage and Increased Revenue- Previously, businesses operating outside the formal system might have avoided paying taxes (like GST - Goods and Services Tax) through tax arbitrage. With increased internet penetration and digitalization, these businesses are more likely to come under the tax net. This can lead to higher government revenue, benefiting the economy and indirectly impacting mutual fund returns.

To conclude, the internet is transforming the way we invest. With the speeding demand, investing in mutual funds is no longer reserved for the wealthy elite. Nearly 1.6 lakh crore (i.e 6.27%) has been invested in mutual funds in the last fiscal year and it is increasing, year-on-year. 

The digital revolution isn't just about statistics. It's about empowering you to take control of your financial future. Mutual funds today offer easy liquidity, a regulated framework for security and returns better than almost all other investments.