Retail investors predominantly invest in equity mutual fundsand, as per data put out by the Association of Mutual Funds in India in December, over 95% of the assets under management (AUM) in debt mutual funds (MFs) comes from corporate entities, while over 90% of equity AUM comes from retail and HNI (high net worth individuals) investors. This dichotomy is puzzling on two fronts. First, if you consider overall fixed deposit (FD) volumes, it outstrips the MF industry itself. Further, if you add PF balance, post office savings and the like, it is clear that retail investors do consider investing in fixed income instruments. However, they have not really participated in debt MFs. Retail investment in liquid and overnight funds is less than ₹55,000 crore compared to over ₹23 trillion (as per central bank data) held in current and savings accounts (CASA) in the country.
Second, as a category, debt MFs provide significant benefits to investors, whether retail or corporate. Today, retail investors typically park their money in savings accounts which earn around 3-4% per annum. However, MFs offer many solutions to parking funds which have potential to deliver better returns to investors. There are overnight funds for immediately liquidity purposes, there are liquid funds which allow you to park money for up to 3 months, and there are money market funds that help you deploy money for up to 12 months. These products are extensively used by corporates to deploy their surplus funds. So why should retail investors not use these funds to generate better returns on their money? Let’s examine these reasons in some depth.
For many investors, the individual comfort of a bank branch or a relationship manager is very important. Particularly for senior citizens, the experience of walking into a branch and having a conversation with their branch manager is an important ritual. For others, there is a lack of knowledge of debt MFs because many financial advisers also do not focus on these products given their lower margins. And in some cases, it is simply inertia. The money that comes in as a salary in the bank account each month simply stays there and earns whatever it does simply because most people ignore it.
Here’s a simple test for you. When you next check your bank account statement, see how much surplus money you had each month (after paying all your expenses and EMIs) for the past 12 months. Then calculate the extra returns you would have made by deploying this surplus in liquid funds. As a simple proxy, you can use 6.5% as the return liquid funds have made in the last year (Note: Past performance may or may not be sustained in future). Compare that with the interest rate your bank provides you in your savings account. I am certain you will be surprised at the amount of extra money you could have made. I certainly was, and once I had figured out the difference, I switched to debt funds at once. And, by deploying ₹23 trillion in CASA in India, investors are foregoing almost ₹60,000 crore of additional return potential each year!
Of course, switching to debt MFs does involve a change in behaviour. It also probably can’t compete with the warmth of a cup of tea and conversation with a branch manager. However, the process of investing in MFs has become simpler and more streamlined than before and even redemptions of up to ₹50,000 can be done in liquid funds and overnight funds in a matter of seconds. There is no difference in rate of taxation of returns between a savings account or a liquid and overnight MFs—both are taxable at marginal rate. Overnight funds also have no exit loads, while liquid funds have no exit loads after 7 days in most cases. So, the liquidity and taxation differences between the two sets of instruments are very small. Ultimately, it is for you to decide if the extra returns you can make are worth the extra effort or not.
(Disclaimer: Returns from liquid funds vary depending on underlying money market conditions. The returns on the traditional banking products usually are stable over the long period of time.)
Ganesh Mohan is CEO, Bajaj Finserv AMC.
