Post demonetisation, MFs eye Rs 1.5 trillion from HNIs, retail investors

Expecting a surge in investments in financial products post demonetisation, the mutual fund industry is preparing for a huge inflow of nearly Rs 1.5 lakh crore from retail and HNI investors over the medium term. Among other benefits, the demonetisation move is expected to ease inflation, improve the government’s fiscal position and help ease interest rates in the coming quarters — which in turn, may lead to investors tap investment avenues like mutual funds, feel industry experts.

“Post this period of adjustment of 2-3 quarters, we are anticipating an extremely bullish phase in equity 

markets. Mutual funds (MFs) are set to gain with a sentimental cloud on real estate and gold as investment options. I expect the industry as a whole to double in next three years, aided by virtuous cycle of strong performance and strong inflows from investors,” Motilal Oswal Asset Management Company MD and CEO Aashish Somaiyaa said.

The government has decided to withdraw the existing Rs 500 and Rs 1,000 currency notes in order to curb black money. Fund managers expect that investors might soon start seeing the benefits of market-linked, inflation-beating and highly liquid investments like MFs, instead of opting for cash and material investments such as gold and real estate. 

“Given the fact that currency notes accounted for 9 per cent of total financial savings in the country, compared to 6 per cent in capital market assets, it is logical for us to expect that the share of capital market assets would rise eventually at the cost of currency notes or physical assets like real estate or gold, which were traditional repositories of cash transactions,” DHFL Pramerica AMC CIO (Equities) E A Sundaram said.

Srikanth Meenakshi, COO and Co-Founder at FundsIndia.com, said that immediate impact of demonetisation could lead to inflow into liquid funds as banks flush with money resort to investing it and one of the avenues will be liquid funds. This is temporary investment and can be liquidated any time.

As of March-end 2015, individual (excluding corporates and institutions) deposit values in banks stood at around Rs 50.6 lakh crore. Retail and HNI money in MFs is just 15 per cent of this at present at 7.5 lakh crore. “Experts peg the inflow into banks from demonetisation at anywhere between Rs 8 lakh and 12 lakh crore. Assuming the 15 per cent share in MFs continue, it would boost the inflows in the retail and HNI segment alone by Rs 1-1.5 lakh crore over the medium term,” Meenakshi added.

Banking sector inflows are expected to move additional money to liquid fund and short term debt funds. Besides, there should be some amount of inflows into short-term and dynamic bond funds to benefit from the expected fall in interest rates as CPI inflation is expected to move towards 4.5 per cent levels in the coming months, Quantum AMC Chief Executive Jimmy Patel said.

“We expect a strong momentum from demonetisation initiative by the government. We see this as a huge positive for the entire MF industry which will be a strong beneficiary as investors opt for safer and more structured avenues for wealth creation,” Reliance MF CEO Sundeep Sikka said. The MF industry reached Rs 16.3 lakh crore in Asset Under Management (AUM) during October 2016 and the industry is aiming to cross the Rs 20 lakh crore mark soon as more and more money is channelised into banks and the country moves towards a digital economy.

“Demonetisation has accelerated our growth and will enable huge inflows into the economy and stock market through structured investment routes. We see the MF industry crossing the Rs 20 lakh crore mark very soon,” Sikka said.

This week, markets may see volatile trading sessions this week amid derivatives expiry, while currency demonetisation and Parliament proceedings would continue to impact sentiment, say experts. “We believe currency demonetisation to continue putting its impact in the market emotion and consequently driving the sentiments. Moreover, there is not much of economic event due this week so it’s all demonetisation news to play the role,” said Abnish Kumar Sudhanshu, Director & Research Head, Amrapali Aadya Trading & Investments.

“During the week if bank deposit growth rises more than expectation amid demonetisation of currency then market is expected to take it positively,” Sudhanshu noted. Analysts said that market will keenly watch updates related to demonetisation and proceedings of Parliament.

“This week, global clues and parliament proceedings will dominate markets sentiments,” said Vijay Singhania, Founder-Director, Trade Smart Online. “Back home, liquidity issue continues to hit the economy due recent demonetisation move by the government. While the ongoing disruption in the Parliament session will continue to affect market sentiments,” he added.

Among major earnings, Larsen & Toubro will announce its quarterly earnings this week. “Market is expected to become volatile due to future and options contract expiry,” said Rohit Gadia, Founder & CEO, CapitalVia Global Research Ltd. Over the last week, the Sensex crumbled 668.58 points, or 2.49 per cent, while the Nifty plunged 222.20 points, or 2.67 per cent.

Thanks to demonetisation, banks will be flush with liquidity, which will support transmission into a variety of rates - lending, deposit and government bond yields. According to HSBC, if for instance about 80 per cent of the outstanding stock of Rs 500/1,000 notes is deposited into banks, the deposit base could rise by Rs 11.3 trillion (USD 170 billion, about 7.5 per cent of GDP) by December. This would be unequivocally supportive of lower deposit and lending rates.

Regarding RBI’s monetary policy stance, the report said that expectations of lower growth and inflation solidify its 25 bps rate cut call for the current fiscal year..