Tuesday 5 December 2017

Demonetisation drives India’s AUM industry growth

Demonetisation AUM growth benefits Mutual Fund

Demonetization can be largely associated with the transition of monetary assets. Exchanging the illegal tender with the legal one. Be it the transition from barter to bronze coins or from cash king to less cash society.  Demonetization in India was largely a hit on pirates’ buried treasure – the Black Money. This was a part of the long-term war on cash that the country has waged. Cash is just a tender issued by central banks and it cannot act as a commodity. Black money holders consider cash as a revenue stream generated from illegal activities or activities which go beyond legal framework. In a rich country like India with poorer citizens, demonetization is a human issue as it also questions the earnings of the low wager and their saving abilities.

One thing demonetisation announced by PM Modi has achieved in large. The citizens of this country started to show interests in financial reconsolidation, few even talking the language of financial experts and economists. Political opponents without studying data did their best to attack the demonetisation decision. It can be debated whether the implementation could have been better also taking into the account of secrecy to be maintained. Now that, most of the notes are back into the formal system, the responsibility to act is now with Income Tax department.

The sudden ban on high value propelled people to invest in formal investments channels like banks, mutual funds and bond markets. Investments in gold and real estate became unreliable. Typically, the Indian households are major savers in the economy contributing 70 to 80 % of the gross domestic saving. These include physical assets namely real estate/gold etc. –constitute a major portion and the financial assets are mainly cash/bank deposits/ etc. Interestingly the recent data show that data from the Reserve Bank of India (RBI) shows that gross financial savings rose to 11.8% of the gross national disposable income (GNDI) in the fiscal year 2017, a notable climb of 90 basis points from 10.9% in the previous year.

Indians invested 1.2% of their disposable income into shares and bonds, a massive improvement from the average 0.2% in the years before. A look at how stock indices have soared since demonetisation should be enough to add a sense of certainty to this. The inflows into equity mutual fund schemes are another indicator of how the stock market gained from getting a bigger slice of household savings. The economy had seen a correction by back-to-back key economic reforms like demonetisation and GST, yet the BSE Sensex touch 33,500 in November 2017. The insurance sector also benefited with 2.9% of disposable income investments.

But before we rejoice, a look at household debt is warranted. Household debt rose to 3.7% of GNDI from 3.1% which means Indians resorted to loans after being bereft of cash. Adjusted for this, net financial savings come to 8.1% of GNDI, while that into physical assets is still higher at 10.7%. ‘Mutual Funds Sahi Hain’ campaign by AMFI encouraged savings in Assets Under Management (AUM) industry by targeting low-income and middle-income groups. Reflective to this, AUM by mutual funds increased to Rs 17.5 trillion by end of March 2017 and further Rs 21.4 trillion by October 2017. Higher resource mobilisation by mutual funds after demonetisation has mainly driven by retail and high net worth individual investors. Disposable savings, low-cost stock brokers, public trust and buoyant stock markets have been key to rise in AUM investments.

India enjoys a traditional bias towards physical assets, over financial investment. As per the Credit Suisse Global Wealth Report, 2016, financial assets in India account for around 10 per cent of total wealth against 51 per cent, 53 per cent and 72 per cent in UK, Japan and the US, respectively. With GST and other reforms, the organised sector is expected to grow at a faster rate than an unorganized sector. As India enjoys high GDP growth, investments in AUMs could become a structural trend.

- Chaitanya Kulkarni

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