MUMBAI, OCT 23: Mutual funds are now competing with commercial banks in the race for retail investors' savings and corporate float money. Although there are no conclusive statistics to support this phenomenon, bankers said a migration from bank deposits to mutual funds was indeed taking place.As mutual funds also maintain their accounts with commercial banks, the central bank's data does not show the flow of deposits from banks to mutual funds. ``What happens is that the overall deposits with banks remain the same but the volatility of deposits (with banks) increases as the control is now with the mutual funds,'' said a bank official. The fund mobilisation trend by mutual funds in the current year indicates that money is going to mutual funds in a big way. Mutual funds in India had collected a total of Rs 21,200 crore ($4.9 billion) in the first half of this financial year (1999-2000), almost matching what they managed in the whole of 1998-99. The Securities and Exchange Board of India expects the fullyear's mobilisation to top a record Rs 41,000 crore.Finance Minister Yashwant Sinha had exempted income from mutual funds from dividend tax in the 1999-2000 Union budget earlier this year, reviving a near dormant mutual fund industry. ``Private mutual funds are now giving half-yearly and even quarterly dividends to investors. With dividends now tax-free, investors are naturally attracted,'' said an investor.``Corporate cash floats and individual investor's savings are increasingly finding their way into mutual funds because of higher returns. But these returns are higher because of the tax exemption element," said a banker. While banks offer interest rates ranging from 9 per cent to 11 per cent for one year term deposits, these returns are subject to taxation. On the other hand, debt mutual funds give tax-free returns of 11 to 12 per cent.``There is no denying the fact that savvy investors are no longer content with the rates of interest offered by banks and are taking their deposits to mutualfunds but in the long run interest rates will realign,'' said an official of IDBI Bank, adding, ``As and when interest rates on saving deposits are deregulated banks will start offering comparable returns. Moreover, private banks and foreign banks are already offering comparable rates of return on term deposits.'' But some bankers also felt a more level playing field was possible by doing away with the requirement of tax deducted at source (TDS) on bank interest. "The anomaly can be removed and parity restored by abolishing TDS on bank deposit interest," Prabhu said.However, some bankers felt the resource mobilising capacity of banks would not be diminished by depositors shifting to mutual funds. "Those averse to taking price risks and interest rate risks will continue to put money in bank deposits which offers stable returns.," a banking analyst said, adding that any anomaly was not expected to last long. "The tax exemption for income from mutual funds was offered for a period of three years and myguess is the facility will not be extended after that period."There has been a distinct change in the fund mobilisation pattern in India. The monopoly of the UTI in fund mobilisation is under serious threat as private MFs are launching attractive schemes with novel features. Most of them are also performing well with many funds even outperforming Bombay Stock Exchange Sensex.
