Over the past three years investment in mutual funds (MFs) have almost doubled while bank deposits grew by about 34%, which shows that MFs are becoming preferred avenue for investors. However going forward, the choice between debt and equity will vary depending upon expected returns as well as tax benefits offered, says a research note.
In a report, Care Ratings says, "The fact that households are accessing these funds is significant as it competes directly with bank deposits which hitherto were the most preferred vehicle for parking savings. The relatively higher returns on bonds with certain accompanying tax benefits if held for a period of over three years makes them more attractive than bank deposits. In FY2017-18 it has been observed that there was conscious migration from bank deposits to mutual funds as deposit rates had come down sharply making them less remunerative."
The MF industry has an overall corpus of about Rs20 lakh crore with asset under management (AUM) of 18% of outstanding deposits in the system. The significant part of this growth is that it is well dispersed across both debt and equity, the ratings agency says.
According to Care Ratings, of late mutual funds activity in the equity market has been more significant in driving sentiment than that of FPIs.
The share of mutual funds in savings deployed in both deposits and mutual funds was stable between 11-12% which increased in FY17 and further to 15.7% in FY17. This is definitely a sharp increase witnessed which is even more distinct when looked at in incremental terms, the ratings agency says.
The steady increase in the share of mutual funds in total incremental savings deployed in deposits and mutual funds increased from 11.1% in 2014-15 to 27.5% in 2017-18.
Care Ratings says, the continuous upward trend is indicative of the investors becoming savvier with the markets. "Mutual funds have been the most effective way of getting retail participation in both the equity and debt markets. This has also been used by corporates to earn better yields on their investments compared with bank deposits, which was a traditional channel for deployment of surplus funds. The declining interest rate trend of deposits has been a deterrent for savers as debt mutual funds have been offering returns of 100-200 basis points (bps) higher depending on the risk profile of the portfolio," it added.
According to the report, balanced funds, followed by growth or equity funds are most preferred instruments for investors. Over the past five years, AUM of MFs have grown at a compounded annual growth rate (CAGR) of 25%. Balanced fund witnessed highest growth at 43% followed by growth or equity funds at 34.2%.
"Income and debt funds which compete directly with bank deposits witnessed growth of 18% per annum. The higher growth rate witnessed in case of equity also reflects the changing risk profile of investors including household and corporates where there is an attempt to maximize returns by taking on a certain modicum of risk," Care Ratings says.
According to the report, the AUM patterns of all MFs put together have shown varying trends between 2012-2018. It says, "With FMPs being largely popular, the share of income or debt funds was high at 72.8% in 2013-14. Subsequently due to change in tax laws relating to investment in debt funds with regards to capital gains in the Budget, there was a migration away from debt funds and the share has come down to 43.1% in 2017-18. Simultaneously there has been an increase in the share of growth or equity schemes with the share moving up from 24.6% to 35.1% during this period."
"The investor appetite for equity has increased over time and it will be interesting to see whether this trend will be sustained considering that the Union Budget of 2018-19 has introduced long terms capital gains (LTCG) tax on equity as well as equity funds. In fact, with deposits becoming less popular in 2017-18, households preferred to move to mutual funds and also took on higher
risk through equity funds investment besides balanced funds where typically 65% investment is in equity," the report says.
Talking about tenure of investment, Care Ratings found that there is a preference of relatively shorter and longer tenures of investment with investment portfolio for 90 to 182 days having lowest share in the AUM.
Deployment of these funds in various instruments is also important as they vary in terms of risk profile, tenure and issuer, the ratings agency says.
Care Ratings says over half of the investments are in corporate debt and CP with these two accounting for 52% of total. This is followed by CDs with almost 12% and PSU Bonds with 11%. Government Securities (GSecs) come much lower with around 7%. "The investment pattern is hence also reflective of the returns that are earned on the portfolio as corporate debt and CPs earn higher returns relative to CDs and PSU bonds. The latter are perceived as being less risky relative to the former two instruments," it added.
Talking about sectoral deployment by MFs, the report points out that banks and finance account for about 30% of the total funds. If software, which is part of the services sector, is added, then 40% of allocation is in the service area. The next two important sectors are in the consumer segment – automobiles and non-durable goods (FMCG), which would be the ones which have steady demand
and more importantly are free of any regulation. Pharma comes next which has global influences too and is regulated to a certain extent but has steady state demand usually.
"The relatively riskier sectors are construction, petroleum products and power, which are not just subject to policy changes and reforms at various points of time but also counter volatile prices which affect the concerned companies. Cement, capital goods and durable goods come in with shares of 2-3%, while the rest are less than 2% and includes metals, chemicals, transport, telecom, textiles, oils, and hotels," the report says.