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Mutual Funds to Gain from Demonetisation Pain
Thu, 22 Dec Pre-Open

The rush to move to a cashless society has begun, and how. After the government scrapped high value notes on 8 November, people have been compelled to deposit their old high value currency notes into their bank accounts.

All the negative impacts of demonetisation aside, deposits of an unprecedented amount of cash in the banking system could very well have a positive impact on the financial investment industry. More particularly, the mutual fund industry.

The mutual fund industry grew at a rapid pace in 2016, with an addition of almost Rs 4 trillion - an increase of 28%, to its asset base.

Having already attained a record asset under management (AUM) of Rs 16.5 trillion in November 2016, fund houses are looking to end the year with an AUM of at least Rs 17 trillion. The fund houses have ambitiously set a target of crossing over Rs 20 trillion worth of AUM in the next year.

The total industry AUM stood at Rs 13.4 trillion at the end of 2015 and has grown at a Compounded Annual Growth Rate (CAGR) rate of 12.4% from and Rs 6.6 trillion in 2009.

According to industry experts, equities than fixed deposits as an asset class has found favour with the general public.

This is good for the economy since it converts the cash assets into financial investments. To better understand this, fixed deposits on an average has given returns of about 7% for a period of one year. Inflation rates in India, calculated on the basis of Consumer Price Index (CPI) on an average stand at 5.5% in 2016. Thus, a fixed deposit for a year would stand to gain only a meagre 1.5% real interest after taking retail inflation into consideration. As inflation continues to grow and the interest rates remain stagnant, the investor doesn't really gain much over a period of time.

On the other hand, the benchmark equity index, Sensex has delivered a CAGR of over 15% since inception. Comfortably beating the inflation rate. Thus providing investors with a higher real returns.

As more and more people are becoming educated about equities as an asset class and their superior potential of providing risk adjusted returns, the mutual fund industry stands to benefit from a fresh and additional inflow of money from its unitholders. The fund houses thus continue to remain optimistic regardless of this demonetisation hiccup in the short run.

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Nov 24, 2017 03:37 PM