Changing saving habits

“Savers are slowly understanding mutual funds,” said K V Kamath at the Business Standard BFSI Insight Summit last month. I was reminded of an incident that happened almost 30 years ago.

I was based out of Chennai and had the habit of visiting a neighbourhood investment advisory outlet that stocked initial public offering (IPO) forms for up-and-coming public offers. The forms, more than 40, were neatly arranged, almost like newspapers at a vendor’s stall. I was slowly going through the forms, trying to remember the IPO reviews I had read in the business dailies. I noticed an autorickshaw coming to a halt outside the outlet. The driver got out and rushed inside. He saw me looking at the forms intensely and asked me: “Yedhula podalam saar” (In what should I put my money?). I realised that this young man had no clue about share market or investment. He probably viewed investing in an IPO as similar to buying a lottery ticket. I could not restrain myself and told him: “Lottery ticket la pooduya” (Put your money in a lottery ticket). He cursed me and left the outlet to look for his next “savaari” (ride).

Those were the days of the Harshad Mehta scam. IPOs were oversubscribed by a large margin and getting allotment was like winning a lottery. A number of naïve investors rushed in like my autorickshaw driver friend. Only to exit with nothing in their pocket.

Due to these boom and bust days of the Indian stock market the common investor was always very wary of investing in stocks and shares. Mutual funds, too, suffered a big setback when Unit Scheme 64 had a meltdown. And a number of investors, who had parked their money in US64, had to suffer a huge loss.

There is also the problem of herd mentality as far as stock market investing is concerned. When the index rises, small investors rush in. When it falls, they stay away. Some of them panic and sell. But behavioural economics tells us that small investors don’t sell when they should because they suffer from what is known as “loss aversion”. Experiments have demonstrated that we tend to value something in hand as a lot more than something that we don’t have. We hate to book a loss on a share. And we end up holding on to dud shares for a lot longer than we should.

This is where a mutual fund and a professional investment manager scores over an individual investor. The fund manager is dispassionate about buying and selling. They may have some favourites but they go by the fundamentals. And they almost always perform better than the lay investor (experts tell me that simple index funds often perform better than schemes managed by experts).

The other problem is that investors come when the index rises. And they stay away when the index falls. The Association of Mutual Funds in India (AMFI) has done a stellar job in spreading the mutual fund culture. Their campaign tag line, “Mutual Funds Sahi Hai”, is today a widely recalled slogan. The other effort they have made is even more laudatory. They have built a strong push for SIP or Systematic Investment Plan. You invest the same amount of money every month, don’t worry about the ups and downs of the market. From what we heard Kamath say, that seems to be finding favour. Money flow into mutual funds is not swinging with the ups and downs of the market. Right through 2022 when the market was moving sideways, from January 1, 2022, to January 1, 2023, the Nifty hardly recorded a gain, but mutual funds, and especially SIPs, continued to clock inflows.

So can AMFI declare victory? Not really.

Reserve Bank of India data about household financial savings paints a different picture. Indians invest in gold and real estate in big numbers but if we take those out and look at just the financial savings, the picture is not something to cheer about. The biggest chunk of savings goes into what have traditionally been the big buckets: bank deposits (35 per cent), life insurance (18 per cent) and provident fund/public provident fund (22 per cent). These three together account for a whopping 75 per cent. Mutual funds come in at a respectable 6 per cent and small savings account for 7 per cent. Pure equity investments are a paltry 1 per cent.

A Crisil report says that over the last five years mutual funds have outgrown life insurance and may overtake life insurance premiums paid by the year 2027.

App-based trading has opened the floodgates and if you were to study the growth of demat accounts, we should see a big upward movement in pure equity investments and exchange traded funds.

The mutual fund industry should be justifiably proud to have worked together, and with regulators, to bring about a slow change in public attitude towards mutual funds. The topic of mutual funds has become so popular that there is even a bestseller, Let’s Talk Mutual Funds, by veteran financial journalist Monika Halan.

One caution remains. A big crash like what we saw in 2020 may see investors running back to gold and fixed deposits. But for that black swan event we can hope to see Kamath’s words ring true for the coming decade.

Ambi Parameswaran is a bestselling author, independent brand coach and founder brand-building.com a brand advisory. He can be reached at ambimgp@brand-building.com