Why are retail MF investors obsessed with equity?

Traditional wisdom in the mutual fund industry says that retail investors predominantly invest in equity products while corporates invest largely in debt or fixed income products. As per AMFI data of December 2023, over 95% of the assets under management (AUM) in debt mutual funds comes from corporate entities, while over 90% of equity AUM comes from retail and HNI investors. As someone who entered this industry recently, this dichotomy really puzzled me on two fronts.

Firstly, if you consider overall FD volumes it outstrips the mutual fund industry itself. Further, if you add EPFO balances, post office savings and the like it is clear that retail investors do consider investing in fixed income instruments. However, they have not really participated in debt mutual funds. Retail investment in liquid and overnight funds is less than Rs. 55,000 Cr. compared to over Rs. 23 Lakh Cr held in current and savings accounts in the country.

Secondly, as a category, debt mutual funds provide significant benefits to investors, whether retail or corporate. Today, retail investors typically park their money in savings accounts which earn around 3-4% per annum. However, mutual funds offer many solutions to parking funds which have potential to deliver better returns to investors. There are overnight funds for immediately liquidity purposes, there are liquid funds which allow you to park money for up to 3 months, and there are money market funds that help you deploy money for up to 12 months.

These products are extensively used by CFOs and Treasurers of corporates to deploy their surplus funds – corporate treasuries hardly ever keep their money in savings accounts. So why should retail investors not use these funds to generate better returns on their money? There are of course some reasons why this is the norm today. Let’s examine these reasons in some depth.

For many investors, the individual comfort of a bank branch or a relationship manager is very important. Particularly for senior citizens, the experience of walking into a branch and having a conversation with their branch manager is an important ritual. For others, there is a lack of knowledge of debt mutual funds because many financial advisors also do not focus on these products given their lower margins. And in some cases, it is simply inertia. The money that comes in as a salary in the bank account each month simply stays there and earns whatever it does simply because most people ignore it.

Here's a simple test for you. When you next check your bank account statement, see how much surplus money you had each month (after paying all your expenses and EMIs) for the past 12 months. Then calculate the extra returns you would have made by deploying this surplus in liquid funds. As a simple proxy, you can use 6.5% as the return liquid funds have made in the last year (Note: Past performance may or may not be sustained in future). Compare that with the interest rate your bank provides you in your savings account. I am certain you will be surprised at the amount of extra money you could have made. I certainly was, and once I had figured out the difference, I switched to debt funds at once. As on Dec 2023 as per RBI, about Rs 23 lakh crore is deployed in current accounts and savings accounts in India at a conservative estimate, investors are foregoing almost Rs 60,000 Cr of additional return potential each year!

Of course, switching to debt mutual funds does involve a change in behaviour. It also probably can’t compete with the warmth of a cup of tea and conversation with a branch manager. However, the process of investing in mutual funds has become simpler and more streamlined than before and even redemptions of up to Rs 50,000 can be done in liquid funds and overnight funds in a matter of seconds. There is no difference in rate of taxation of returns between a savings account or a liquid and overnight mutual fundas both are taxable at marginal rate.

Overnight funds also have no exit loads, while liquid funds have no exit loads after 7 days in most cases. So, the liquidity and taxation differences between the two sets of instruments are very small.

Ultimately, it is for you to decide if the extra returns you can make are worth the extra effort or not. After all, you have worked extremely hard to earn your money. Isn’t it time your money works equally hard for you?

Disclaimer:

• Returns from liquid funds vary depending on underlying money market conditions. The returns on the traditional banking products usually are stable over the long period of time.
• Demand Deposits CASA: ₹ 23,34,167.00 Cr As on Dec 1st 2023.
• Source: RBI.

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