Demonetisation has positive impact on the mutual fund industry as money moved from banks to mutual funds as the time investor confidence was high and Indian macros were improving. Even crude oil price was coming down. Demonetisation must, however, be noted for the fact that it led to the financialisation of savings as cash as an instrument grew scarce following the government’s decision to demonetise high value currency notes. As such, property, bullion and other asset classes took a hit.
The asset under management of the mutual fund industry has risen by 43.44 per cent or Rs 7.36 lakh crore in the last two year period since demonetisation was announced on November 8, 2016 – going from over Rs 16.94 lakh crore as on December 31, 2016 to over Rs 24.31 lakh crore as on September 30, 2018 as per data provided by the Association of Mutual Funds in India.
The asset under management grew by 26.62 per cent in the first ten to twelve months of demonetisation as AUM grew from Rs 16.94 lakh crore to Rs 21.45 lakh crore by September 2017. The pace is slowing down now with AUM growing by 13.36 per cent in the last one year period from Rs 21.45 lakh crore to Rs 24.31 lakh crore.
Anita Gandhi, whole time director, Arihant Capital Markets said, “Mutual funds saw big inflows post demonetisation because macros were improving, simultaneously crude oil price was coming down, not only liquidity was there, the investor confidence was high unlike today when IL&FS is casting a shadow on future investments. That time environment was also such that money moved to mutual funds.”
The banks lowered fixed deposit rates as they were flush with fresh deposits and the rates were lowered by 25 to 50 basis points. As the fixed deposit rates were in the range of 6 per cent to 6.25 per cent, money started moving to the mutual funds.
State Bank of India alone collected Rs 1,14,139 crore in deposits in first seven days after the government announced to scrap Rs 500 and Rs 1,000 notes. Flush with cash due to the demonetisation exercise of the government, SBI on November 17 slashed fixed deposit rates on select maturities by up to 0.15 per cent.
Money also moved to mutual fund industry because equity as an asset class looked far more promising than the traditional fixed deposits where Indians had parked their household saving so far.
With equities doing well, the inflows in equity mutual funds started moving up from February 2017(Rs 6,462 crore) after a dip seen in January 2017(Rs 4,880 crore) to Rs 10,880 crore in April 2017. The inflows in equity mutual funds touched a high of Rs 20,308 crore last year in November.
Last year in November-December, the effect of demonetisation started waning as the equity mutual fund saw reduced inflow of Rs 16,087 crore in December. For the last one year period the flows have been moderating from the November 2017 highs.
Meanwhile, the systematic investment plan method of investment has kept the flows away from falling drastically as the demonetisation effect is waning. In September 2018, Rs 7,727 crore was collected through SIP investments only, a surge by 47 per cent from year ago period.
By comparison, the industry garnered Rs 5,206 crore in August last year and Rs 3,496 crore in August 2016.