Are mutual funds replacing bank deposits as preferred investment option?

1 of 13 5/7/2018 12:22 PM MUTUAL FUNDS Investor Interest Are mutual funds replacing bank deposits as preferred investment option? Moneylife Digital Team 04 May 2018 1 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 Get Moneylife's Top Stories by Email SUBSCRIBE

2 of 13 5/7/2018 12:22 PM Merchant M S 2 days ago Choice NEWS is your from & VIEWS deep sea and fire. REPLY 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." Sucheta Dalal Sucheta Dalal with 261,795 supporters 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.

Scuttle Your Insurance Claim Aadhaar puts over a billion Indians at risk, says Mozilla 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%. 75% Information Commissions fail to disclose basic information online under... Never mind RTI; UPSC marks need not be disclosed Stock Analysis: Focus on Debt and Cash Flows, Not Just Profits SIP: Systematic but Not Safe Investment Plan Zerodha blames Metro digging in Mumbai for two-hour outage on 2nd May '74% home buyers unaware of RERA compliance check process' Aadhaar EPFO Service website data stolen by hackers? Nifty, Sensex Headed for More Gains Monday closing report "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. 3 of 13 5/7/2018 12:22 PM

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. 4 of 13 5/7/2018 12:22 PM

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. 5 of 13 5/7/2018 12:22 PM

6 of 13 5/7/2018 12:22 PM "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 IN YOUR and INTEREST 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. Like this story? Get our top stories by email. User What do you think?... Write your comments Alert me when a new comment is posted Submit COMMENTS Daily News: Our Picks MUTUAL FUNDS Are mutual funds replacing bank deposits as preferred investment option? Moneylife Digital Team RIGHT TO INFORMATION UID/AADHAAR RIGHT TO INFORMATION Never mind RTI; UPSC marks need not be disclosed Aadhaar puts over a billion Indians at risk, s... 75% Information Commissions fail to disclose basic informati... VINITA DESHMUKH > DIGITAL TEAM > DIGITAL TEAM >

7 of 13 5/7/2018 12:22 PM SIP: Systematic but Not Safe Investment Plan Mehrab Irani 04 May 2018 2 Either you control money or money controls you and then it controls your life, freedom, dreams, heart and soul. And, to achieve financial freedom and fulfil your long-term goals, the best argument put forth by mutual funds (MFs), their distributors and financial planners is SIP or systematic investment plan. SIP is generally marketed as a safe and sure route for investments in equities to create wealth over the long term. SIP is certainly safe for mutual funds and distributors because they get committed continuous money for the long term on which they can earn a fixed percentage of fees and commissions. It is also safe for financial planners to recommend because, if anything goes wrong, they can blame the SIP concept. However, is SIP safe for an investor? This article attempts to examine and bisect SIP in a manner probably never done before. Get Moneylife's Top Stories by Email SUBSCRIBE SIP is nothing but a regular investment plan, mostly monthly or quarterly, of a particular amount in an MF scheme. It is similar to a recurring fixed deposit with a bank. It allows an investor to deposit a small amount at regular intervals instead of a single one-time investment. Benefits of Investing through SIP Rupee Cost Averaging: This is supposed to be the primary benefit of

REPLY Niranjan Sarkar 1 week ago I think any investor would know that no investment vehicle is "safe". And as for the MF houses and their distributors they will always say that our "toothpaste" is the best. Ultimately investing boils down to how the market move, the time frame of investment and when you put in the money. For average investors with no "insider" information I think a methodical approach is better than an ad-hoc or friend/relative advise or trying to time the market approaches. And that is the cost they pay. This does not of course mean that the SIP investor should close their eyes and forget about their money and expect a "safe" return. In today's scenario, even an FD with a PSU bank may not be safe! REPLY investing through the SIP route which has made it so popular among investors. What is the cardinal principle of buying anything in this world? Buy when the price is low. Rupee cost averaging simply does that by automatically buying more units when the price is low and marketed. But does this really benefit the investor? Read on. purchasing less when the price is high. This is the primary advantage of a SIP one on which it is being sold and Regularity of Investments: SIP regularises the investment process by making it mechanical. It removes human judgement from the decision-making process. It instils discipline in the investor and helps him/her stay focused, investing regularly for the long term. Power of Compounding: Compounding has been labelled the eighth wonder of the world and it really is. Very few people realise how powerful compounding is, over long periods small amounts compounded regularly over longer periods make a big difference in the final results. For example, Rs5,000 invested monthly at 10%pa (per annum) return over a 30-year or a 35-year period would accumulate to Rs1.13 crore or Rs1.90 crore, respectively a massive difference of Rs77 lakh. Hence, just by starting five years earlier, a person would, ultimately, be able to accumulate Rs77 lakh or 70% more. That is the power of compounding. The first one, i.e., rupee cost averaging is the general perceived benefit of investing through the SIP route the other two are advantages of investing through any regular investment method. Now, let us consider that whether SIP is 8 of 13 5/7/2018 12:22 PM

Nifty is around 10,500 levels today and, if you know with certainty that it is going o become 12,500 after one year, then you would, obviously, be better off buying your entire investment quantity today at the lowest value rather than keep averaging upwards month after month through the SIP route. On the other hand, if you know that the Nifty is likely to go down to 9,000 in the next one year, then forget SIP or lump-sum, you would be richer not investing in equities. Therefore, SIP is not some magic that it will outperform the lump-sum investing method or always give positive returns, even over the long term. So, what are the conditions under which SIP works? When SIP Works Bull or Rising Market: SIP would yield positive results in a bull, or rising, market as every new purchase, although made at a higher cost, is valued at an even higher price, finally. However, as seen earlier, in such a case, it would be wiser to buy the entire investment in one go rather than keep averaging upwards through the SIP route. Volatile but Rising Market: SIP should perform well in a volatile but, ultimately, rising, or bull, market. This would be the market in which the rupee cost averaging would work most favourably for the investor, as volatility would lead to the best possible average price. The final rising or subsequent bull market would ensure that the end price is higher than the average price. Market Corrects Downwards and Then Moves Up: This would be another case in which SIP would perform well and, in all likelihood, be better than initial lump-sum investment. This is because the investor will get the advantage of the intermediate correction to lower his average cost. But does this mean that SIP works under all market conditions? Certainly not. So, let us now examine the market conditions under which SIP would not work. When SIP Does Not Work Bear or Falling Market: SIP would not work and, in fact, yield negative returns in a bear, or falling, market as every new purchase, although made at a lower cost, would eventually be valued at an even lower price. In such a market scenario, SIP might outperform lump-sum investments as the investor will get the benefit of averaging downwards but the investor will still lose money. I believe, it should be the endeavour of every investor to make money by investing and not simply lose less. 9 of 13 5/7/2018 12:22 PM

Market Moves Upwards and Then Moves Down: This would be one more case n which SIP would not perform because the investor will actually be hurt by the SIP as he would be averaging northwards while the final value would be much lower due to the subsequent market correction. In fact, in this scenario, lump-sum would perform much better than SIP, as it would not be subjected to the negative effects of higher rupee cost averaging. Therefore, SIP might not always be the best investment route. So, now let us examine when it would be ideal to invest through SIP or when as a lump-sum. Common Misconceptions about SIPs Misconception: SIPs generate higher return than lump-sum investment. 10 of 13 5/7/2018 12:22 PM

Truth: As explained earlier, this is just a misconception disseminated by vested interests like MFs and their distributors. SIP can be as good, or as bad, as lump-sum. It depends on which market condition you are in. Misconception: SIPs always generate positive return over the long term. Truth: There can be nothing farther from the truth. This statement is made under the assumption that equity markets always go up over the long term. If, for whatever reasons, equity markets don t go up over the long term, there is no way in which SIP would be able to generate positive return. And if equity markets, indeed, always go up over the long term, whether SIP or lump-sum, the investor will always get positive return. Misconception: SIP would always give positive return because of rupee cost averaging. Truth: Rupee cost averaging can work in investor s favour or against, depending on the market condition prevailing at the time of investment. If it s a bull market, rupee cost averaging actually works against the investor and vice versa. SIP works on the principle of regular investments and brings the power of compounding. It removes emotions and uncertainty from your investment plan by making it a mechanical, boring process. It inculcates the habit of regular savings and does not encourage timing and speculation in the markets. All these are correct and accepted facts. But, don t forget that SIP is just another method of investing; it is a vehicle not the final destination. It may pass through straight or bumpy roads; it may lead you to your destination in a lesser or higher time-frame; 11 of 13 5/7/2018 12:22 PM

12 of 13 5/7/2018 12:22 PM sometimes, it may not even lead you to your destination by derailing your plan. SIP is just a method of getting on to the investment vehicle to reach your destination. If the vehicle you choose is incorrect, there is less likelihood of you reaching your IN YOUR destination. INTEREST Therefore, the next time a mutual fund or distributor or financial planner advises you that SIPs are the safest route to invest in equities, remember that they are not lying. It is safest route but not for you the investor; it is for their own selves. Like this story? Get our top stories by email. User What do you think?... Write your comments Alert me when a new comment is posted Submit COMMENTS Investor Interest Do Not Wait until January To Save Tax, Start ELSS SIP Now! Moneylife Digital Team 24 April 2018 0 Often, we start putting money into tax-saving investments nearer the end of the

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