The Hindu : Continuing woes of savers

Online edition of India's National Newspaper
Saturday, Dec 13, 2003

Business

Business

Continuing woes of savers

By C. R. L. Narasimhan

A number of mutual funds are offering monthly income plans, which are directly positioned to attract those favouring bank deposits. The confusing interest scenario may dash the hopes of the savings community.

The community of savers, concerned with falling yields on their investment avenues, have yet another causes to worry. Mutual funds, which through their regular return schemes were paying — by today's standards — a decent return, will not be able to do so. There is a consensus that in the vastly changed interest rate environment no fund could possibly deliver a return of more than 8 per cent, with a majority of them paying just 6 per cent. Contrast this with the recent past, many mutual funds that had invested their corpus in debt instruments could pay their unit holders 11 per cent and sometimes even more.

The generous tax exemption considerably enhanced the appeal of mutual funds in a general sense. Many of them have been paying at quarterly intervals and in that sense replicated the fixed deposit schemes of banks. Ordinary investors who spotted those schemes of mutual funds have profited. In comparison to the bank fixed deposit rates they received considerably more: the differential has been at least 5 per cent, sometimes more. Mutual funds also ensured liquidity by permitting repurchase at NAVs and often ensured that the investor got back his money in less than 48 hours. On the other key parameter, safety of funds, mutual funds should normally rank below banks but for most investors there has been no other comparable investment avenue as some mutual funds have been paying. It is relevant to note however that all mutual funds including those, which offered regular return have had to disclose that their investments were subject to market risks and that there can be no guarantee of a fixed regular return.

However in practice many of them did deliver high returns. Ironically that was possible even as the interest rates in general have been coming down sharply. High returns in a falling interest scenario was possible because the mutual funds and others which held fixed rate instruments could book capital gains on them. As interest rate falls the value of the bonds and other fixed instruments in the portfolio goes up. Fund managers generated more income through trading than from their investments per se. Reshuffling their portfolio was eminently feasible and profitable. If by most estimates interest rates in the country have bottomed out, mutual funds cannot earn trading income to the same extent. At the same time the returns on their investments in gilts, bonds and commercial paper will go down, as these instruments will now be reflecting the steep fall in interest rates.

The upshot of all these is ordinary investors can no longer expect mutual funds to bail them out in what has undoubtedly been a most trying time. Add to this the common failings of the Indian investment scene: the high intermediation costs (the salary and other fixed expenses) of mutual funds which undoubtedly depress the returns to investors; the festering issue of failed NBFC in which a large number of investors have lost their money; and the sharp reduction in the bank deposit rates. Today the most orthodox investment avenues give returns that do not cover inflation. There is in fact a disincentive to save. For many individuals there is no option but to take risks even to stay where they are. The booming equity market is one option but for most individual investors it is not an easy option. Mutual funds, a recommended alternative to direct share market investment, offer pure equity schemes as well as balanced and pure debt schemes. Recent experience tells us that equity funds are themselves subject to volatility. In any case they are not meant for those who desire a regular return.

Mutual funds through their monthly income schemes promise a higher return than what pure debt schemes offer. For this they park a portion of the corpus (between 10 and 25 per cent) in equities.

These have become popular but there is no conclusive evidence that these schemes are the answer to the falling interest rates and the consequent low yields.

There has been a risk element in the monthly income schemes. Even the small equity component can jeopardise the earnings from the larger debt component.

Printer friendly page
Send this article to Friends by E-Mail

Business