Households prefer MFs, shares as saving options

Households prefer MFs, shares as saving options.

Source: Times of India
11th Oct, 06.


MUMBAI: The booming stock market seems to be changing the pattern of household savings. Though bank deposits continue to be the hot favourites of the savers, investment in shares and mutual funds is rising sharply. And there is a major drop in household investments in traditional saving instruments like public provident fund, life insurance funds, post office saving schemes and other government guaranteed schemes.

"With the tax benefit for individuals being capped at Rs 1 lakh and there being no restriction on investments, households prefer to invest surplus funds in short-term high-return liquid instruments like equity linked mutual funds, or short-term bank deposits," said a personal finance expert.

The numbers reflect the trend that household savers are highly skewed towards investment instruments with a tenure of one-to-two years. According to RBI data, MFs have mobilised Rs 50,673 crore in 2005-06 as against Rs 2,788 crore in 2004-05. Savings deposits with banks was at Rs 5,75,130 crore in 2005-06 against Rs 4,58,618 crore in 2004-05 and total term deposits of scheduled commercial banks stood at Rs 10,64,146 crore in 2005. An analysis of the maturity pattern of term deposits indicates that public deposits for a tenure of one year and less than two years is the highest (Rs 2,49,091 crore).

PPF has lost charm as it has a lock-in period of five years.

The main drawback being that only after five years can an individual get a loan on the amount. Additionally, the PPF interest rate has fallen to 8% from 12% in the last six to seven years, even as MFs are offering returns in excess of 15%, said an analyst. According to RBI data, bank deposits constituted 46% of the total financial assets in 2005-06 against 36% in 2004-05, shares and debentures accounted for 5% compared to 1.86% last year. The share of PPF has fallen to 9% from a double digit growth of around 12%, claims on government and life insurance fund is also down to 14% each from 16% and 24.42% in previous year.

"In a booming economy long-term savings instruments like life insurance, pension funds tend to lose their sheen. Individuals migrate to short-term, high-yielding and liquid instruments," said a analyst. This is evident from the recent RBI numbers which shows that in the first quarter of 2006-07, net mobilisation of funds by MFs increased by 264.7% to Rs 52,053 crore showing investor interest on account of attractive returns in the secondary market. Net mobilisation in the first quarter of 2006-07 was at almost the same level as during 2005-06. "In a rising interest rate scenario, bank deposits are also getting attractive.

In addition, the benefit of 80(C) on bank deposits for a tenure of five years has boosted the flow further. Overall, bank deposits are always considered as the most secure form of investments," said a banker.