As markets boom, household MF investments rise 74%

Risk averse Indian households are now increasingly using the mutual fund route as a major investment avenue. With the stock markets in the bull orbit

Risk averse Indian households are now increasingly using the mutual fund route as a major investment avenue. With the stock markets in the bull orbit, investments by households in mutual funds rose by nearly 74 per cent to Rs 36,700 crore in 2006-07 from Rs 21,139 crore in the previous year, according to the RBI’s latest annual report.

The mutual fund avenue has come a long way since 2003-04 when household investments were only Rs 1,550 crore. “The rise in investments by households in mutual funds has been increasing over the years. But this is not enough. We have just scratched the surface. We have to increase the awareness level among people,” said Association of Mutual Funds of India chairman A P Kurien. There’s no wonder, assets of mutual funds had more than doubled in the last two years to Rs 486,129 crore at the end of July 2007. “We have not even tapped the full potential in urban areas… there are semi-urban and mofussil areas which need to be tapped,” Kurien said.

Significantly, direct investments by households in shares were only Rs 10,953 crore in 2006-07 as against Rs 8,034 crore. This is only 1.4 per cent of the financial savings of the household sector at Rs 7,58,751 crore. “The number of Indian households that invest in stock markets directly is very less. This could be due to risk aversion and lack of knowledge,” said a fund manager with a mutual fund.

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Indian households are relying less and less on government-sponsored small saving schemes in spite of the safety net attached to such schemes. Investments of Indian households in small saving schemes like PPF and post office schemes which had fallen from Rs 85,106 crore in 2004-05 to Rs 72,778 crore in 2005-06 have now plummeted by 48.4 per cent to Rs 37,544 crore in 2006-07, according to the RBI. Likewise, their investments in government securities also plunged by 89 per cent to Rs 1,654 crore.

On the other hand, bank deposits by households are surging. With one year deposits attracting as much as 9.5-10 per cent interest rates, deposits have surged by 34.91 per cent to Rs 422,114 crore in 2006-07 from Rs 274,747 crore in the previous year. The reasons for the surge in bank deposits is the high interest rates and a shorter lock-in of only one year.

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