A demonetisation announcement shook the nation on 8 November 2016. Although it was a one-time event, it appears that it did have an impact on the savings of Indians as the money that was running in the parallel economy was brought into the banking system. High denomination notes, accounting for almost 86 per cent of the in-circulation currency were deposited, flooding banks with liquidity immediately after demonetisation.
“Though remonetisation does take a part of it back to the cash system, a significant part is still in the banking system, and ultimately across financial instruments. This has clearly led to reduced demand for physical assets and enhanced demand for financial assets,” says Manoj Nagpal, CEO, Outlook Asia Capital.
Banks meanwhile, were forced to slash interest rates on fixed deposits with poor demand for credit and the overall reduction in interest rates. Traditionally, fixed deposits were the most in-demand interest option for Indians, because of guaranteed returns and the assured safety of capital. The dropping interest rates, made more people turn to mutual funds.
Demonetisation was not the primary trigger pushing people towards investment alternatives, factors such as falling interest rates, good returns from equity markets and poor performance of real estate were also in play. That said, demonetisation did place downward pressure on interest rates generating more appeal for mutual funds.
Nagpal points out: “Demonetisation led to a distinct accentuated shift towards capital market instruments such as mutual funds both directly and indirectly. It acted as an added driver. The direct impact has been due convergence of cash pools to the banking system, while the indirect impact has been due to changing macro factors and structurally lower inflation.”
Equity mutual funds received massive net inflows to the tune of Rs 1.23 lakh crore between November 2016 and October 2017 (as per AMFI data compiled by CMIE). This amount is huge, considering that over the past three years there has been collective net inflow of close to 1.67 lakh crore in equity mutual funds. Industry AUM has also reached an all time high of Rs 21 lakh crore as on September end with the equity AUM touching a high of Rs 5.6 lakh crore.
Investors in mutual funds using Systematic Investment Plans (SIP) have increased to record proportions. The SIP is a disciplined way of investing in mutual funds where a person invests a fixed amount regularly; in return, the investor gets the benefit of rupee cost averaging and can avoid market timing. The data provided by Association of Mutual Funds in India shows that fund houses added on average about 8.80 lakh SIP accounts per month in 2017-18, with an average SIP size of about ?3,300 per SIP account.
Experts believe that this shift in investor behaviour in how they view financial assets is likely to continue. “Demonetisation was a onetime event, a year later its effects are almost negligible a most of the upheaval has been absorbed. But it did create a cusp in investors’ saving patterns and those will continue to accrue to capital markets in general and mutual funds in particular,” explains Nagpal.