Mutual Funds And Indians, We Need To Do More
Mutual Funds Sahi hai
Mutual Funds Sahi hai, this is a tagline we have all come to recognise in India. Those of us who want to make others wealthy, also appreciate how much it has contributed. I would go out on a limb and say that this is a campaign making a genuine difference to Indians and their finances. Kudos to those who thought of the campaign at AMFI. Hat tip!!
RBI’s bulletin from March 2021
Last weekend, I was looking through this paper released by RBI – accessible here. It shows the investments by Indian households in recent times. Some very interesting facts in this small paper, such as savings rates, debt etc.
I want to dwell on one thing here which is the investments part.
It was interesting to note that investment flow into mutual funds was steady over the last few quarters. I believe the Mutual Funds Sahi hai campaign is probably responsible for this.
Pandemic not withstanding, investments have been steady. Except Q4 ’20 when the first wave and lockdown caught us all by surprise. The next quarter itself the investments went up. This was when the market was still recovering and there was severe lockdown for most of the quarter.
It is really good to see the confidence that the Indian investor has displayed in the equity market. Of course, the market has also adequately rewarded participation.
If you entered the market on 1st April and stayed put, then as of Nov 1st you would have made a return of 117%. This number is based on the Nifty 50.
No need for anything fancy, just the Nifty 50 Index would have more than doubled your money.
But all is not as well as it can be
Now let me come to the below figure from the RBI paper.
This one is a little troubling.
Bank deposits form 51% of the money invested by Indians against only 6.7% in mutual funds.
For context, this has been the year of relatively low interest on fixed deposits. You would have got in the region of 4.2% to 4.5% on your deposits with most of the large banks.
Also, let us not forget the shadows of PMC and Yes Bank bond deposits should still be on investors. But no, it is not the case.
What is ironic is that the Fixed deposit investor is the one who wants to play safe and not lose capital.
In the last year, the FD investor has received an interest payment of 4.5%. This is in an economy with inflation ranging between 4.4% to 6% from April 2020 to November 2021. Not to mention the income tax the FD investor would have paid, up to 33% for the top bracket.
So, in the last 18 months, the FD investor has actually lost between 1% to 1.5% of his wealth.
In contrast, a person who invested in the top 50 companies in India doubled his money.
What about Debt Funds
To complete the comparison we should also look at debt funds. The RBI paper does not provide a breakup between debt and equity funds, a quick look at value research will help.
Gilt funds over the last 18 months have been in the 3.5% to 4.8% range and the short term debt funds have been in the 5% range. So, they have not performed better than FDs. However, you might get better returns than an FD, depending on your tax bracket.
The debt fund performance makes sense of course. Interest rates are low and equity is doing so well, debt is bound to lag.
For reference Bond funds in the US have given around 1% or lower returns over the last 18 months. The Vanguard Total Bond Market ETF has been negative.
There is more here to worry about
Let us go back to the pie-chart from the RBI paper – we saw that more than half of our investments are in bank deposits.
The other worrisome figure is the insurance one. 24% of investments are in life insurance related instruments.
Now, every financial advisor worth his salt will tell you that insurance is not an investment. Every financial advisor, that is except the one selling insurance of course.
To me, this is a depressing number. 1/4th of our investments are going into an instrument that does not yield adequate returns.
To make it worse, all those investors think they have enough life cover. Assuming these are not term insurances since they would not figure under investments. Please read this article about comparing annuity plans for reference.
To conclude about the picture up above:
- Mutual funds have 6.7% of all investments from Indian investors
- 3 times as much money is invested in life insurance related instruments
- 7 times as much is kept in bank deposits
Between Insurance Funds and Bank Deposits, we have 146 lakh crores in low return instruments. Mutual Funds have 14 lakh crores invested by contrast.
It is a big deal.
People are missing out on making their money work for them and making it work for the economy.
We still have a mountain to climb to educate the investor.
In this uphill battle, we have trusted advisors who will make the journey difficult. Trusted advisors like the avuncular insurance salesman and the friendly bank manager.
Please take the time to educate yourselves and those around you.
I would love to see us get up to 10% of investments flowing into Mutual Funds, to begin with.
Key Takeaways:
- We have progressed significantly due to the Mutual Funds Sahi hai campaign
- During the pandemic also Indians continued investing in Mutual Funds
- Indians still prefer keeping their money in bank deposits and insurance related instruments
- We have a long way to go before Mutual Funds become at least 10% of the Indian investor’s funds
- It is up to us to educate ourselves and those around us about investing in Mutual Funds.
- The difference it can make to individuals in the long term is very real
Disclaimer: This article is based on my interpretation and understanding of the RBI bulletin. In case I have mis-interpreted or mis-understood something, will be happy to be corrected.
This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any significant financial decisions.
