Bank accounts remain the most favoured investment avenue, beating equity, mutual funds and even small savings hollow

Like polly, who famously put the kettle on, most of us are quite used to finding that it's all gone away very soon after it comes in. To find out just how and where the money goes away each month, Business Today commissioned market research firm Synovate to conduct a survey across the six major cities of Mumbai, Delhi, Bangalore, Chennai, Hyderabad and Kolkata. The target audience was 25-54 year olds who belonged to socio-economic classifications (sec) A and B (that roughly translates into households with incomes ranging from Rs 20,000 per month to above Rs 1 lakh per month). The survey was conducted across 725 respondents from various professions and educational backgrounds. They were asked questions about their preferred instruments of investment, their savings, how much they have insured themselves and their belongings for, what they spend on, and how much they resort to loans to fund their necessities and luxuries. The survey shows, surprisingly, that the booming personal finance market and its various products have actually touched very few people. The picture that emerges from the survey, consistent with other indicators, is of an average Indian who is still conservative when it comes to money matters.

It's been clear for a while now that the Government is nudging the retail investor towards equity and away from assured return instruments. The survey, though, makes it clear that the common man is not very good at taking a hint. He is still happily salting away his hard-earned money in the good old savings (SB) account though returns are a paltry 3.5 per cent. Even in commercially savvy Mumbai, 27 per cent of respondents prefer SB accounts and 13 per cent choose bank fixed deposits (FDs). But the 7 per cent looking at equity in Mumbai is still higher than the 1-4 per cent from other cities.

What is surprising, though, is that not enough people are using even the diminished small savings instruments effectively. Given the 8 per cent returns from Public Provident Fund (PPF) or the 7.5 per cent from post office returns, why would the risk-averse investor not choose these over the ubiquitous SB account? Overall, only 6 per cent choose PPFs and 5 per cent, post office savings. Kolkata is a smart city, though, with 14 per cent and 9 per cent choosing to invest in the two avenues.

What's really scary, though, is the number of people that still believe that a box under the bed will not only protect but also magically grow their money. About 11 per cent of the respondents keep money at home, with 16 per cent of the respondents in Delhi guilty of doing this. Given the city's crime record, are they begging for it?

Life insurance is purchased by most people, possibly because of the tax breaks, but most other forms of cover are ignored

In this scenario, it's hardly surprising that mutual funds (MFs) should be almost ignored. Overall, a piffling 2 per cent of respondents choose mf investments. Here too, Kolkata scores better, with 4 per cent of investors, against only 3 per cent in Mumbai, 2 per cent in Delhi, and zero per cent in Bangalore opting for this investment avenue. Of those who do buy MFs, an overwhelming 79 per cent overall are unable or refuse to specify the funds they buy. Since the reply is hardly life-threatening, one can only assume that most simply don't know what they have bought, depending blindly on the friendly neighbourhood broker (or banker) to make their decisions. Among the respondents who do know their investments, diversified funds score high.

The magic word, of course, is gold. An overall 8 per cent of respondents are all for the yellow metal. In Bangalore, 12 per cent buy gold vis-à-vis 2 per cent buying post office instruments, while 9 per cent in Chennai prefer gold against 3 per cent going for mutual funds. What's worrying, though, is the high 63 per cent of respondents overall who buy gold as ornaments (and not coins/bars), in which form it's more an illiquid asset than an investment.

Chennai is obviously a lender's paradise, while Kolkatans borrow very little. But across the country, if there's one loan they are all taking, it's for homes

While most people have life insurance (82 per cent) and Mediclaim (34 per cent), household insurance is neglected (7 per cent). However, 66 per cent of respondents overall still consider life insurance an investment. Whole life and endowment plans are the most popular at 42 per cent and 39 per cent respectively, with only 7 per cent buying pure risk plans.

And where do our respondents spend money? Overall, 32 per cent say monthly groceries and utility bills take up the lion's share. In Delhi, 26 per cent of respondents binge on entertainment and clothes. Interestingly, gizmos are a new addition to household spends. Loan repayments loom large-41 per cent overall have taken loans. It's mostly car and home loans although personal loans seem popular in the south. And 54 per cent people are spending Rs 1,000 to Rs 5,000 a month just on EMIs. Credit rules!

INTERVIEW: Sandesh Kirkire/CEO/Kotak Mahindra Mutual Fund
"To Beat Inflation, People Have To Look At Other Asset Classes"

Equity is on a roll while small savings languish. As traditional avenues dry up, will investors move into mutual funds? Sandesh Kirkire, CEO, Kotak Mahindra Mutual Fund, certainly thinks so. He talks to BT's Mahesh Nayak about reigning trends in mutual fund investments.

What in your view is driving the growth in the economy?

Essentially, there are three segments of the economy that are driving growth in India. First, the global outsourcing story-wage advantage translated across sectors. Second, the demographic impact-50 per cent of the population is less than 25 and the average home acquirer is below 30 years; high aspiration with access to cheap capital leads to spending. And third is the lack of effective infrastructure, which means job creation. This cycle of spending and job creation makes the 8 per cent GDP growth look achievable.

How is this impacting mutual funds?

When the retail balance sheet increases, that is where mutual funds will come in. Five to 10 years back, it didn't matter if your money stayed in bank deposits and if, post-tax, you were barely beating inflation. It didn't matter because cash flow from your job or business was funding your needs. Today, needs have increased, following rising aspiration levels, and you need surplus cash flow to meet EMIs. With traditional savings not able to beat inflation, never mind your EMI, people have to look at other asset classes.

Also, the price escalation that can hit a rising economy in education or medicine will see a large shift of investment into mutual funds. The 'wholesalisation' of the market is also attracting retail investors to mutual funds, as it becomes difficult for them to track the market.

Do you think it will be easy bringing investors into mutual funds?

No. The problem is to educate. The country is abounding with literates, but when it comes to understanding investment, we are still financial illiterates. Mutual fund as a concept is very simple, but people still don't understand NAV. Investors imagine an NAV of Rs 15 per unit is cheaper than Rs 50 per unit. Therefore, existing schemes do not sell. We have to make them understand, and that's the big task. The second issue is of penetration of the mutual fund industry across the market and that remains a big challenge.

"The best way to enter equity is through SIPs. It's a healthy way to built investments"

How difficult is it to sell mutual funds compared to selling insurance?

We are a pass-through, while insurance is not. Second, assurance of return, which an AMC can never commit to, has seen investors going for insurance products despite their lower returns. Another reason is that mutual funds are under-capitalised and the nature of their product is different. Unlike selling bank deposits or postal deposits, selling mutual funds comes with two factors-volatility and risk.

How does a mutual fund compare with unit-linked insurance schemes?

We compete directly with ULIPs. However, the combination of a mutual fund and a term insurance is a better product than a ULIP. If someone takes a sip from a mutual fund and a term insurance from some insurance company, he will be better off than with a ULIP. Investors don't understand that the expense ratio in ULIPs is much higher than in a mutual fund. In ULIPs, the expense ratio is charged on the premium amount, while we charge it on the NAV.

How do you see the role of a distributor in the development of mutual funds?

The role of the distributor cannot be denied. Unlike banks, asset management, although simple, cannot touch the customer. Customer ownership is not with me and this is the fundamental difference between banks and mutual funds. The AMC does not provide the investor with choice, it's the distributor, and the ownership lies with him. The lower capital requirement and the fact that agents are not tied down to a fund have also seen AMCs relying on distributors.

Do you think distributors are misguiding investors and leading them to churn their portfolio unnecessarily?

Yes, wrong advice and MIS-selling does take place. The advisory role of the distributor cannot be denied. An AMC can only conduct investor camps, but ultimately distributors sell the product. I feel they should be brought under some regulation; some degree of corporate governance should be there to track distributor malice. I strongly feel the need for a distributors association, with guidelines from SEBI.

Through which route are retail investors coming into mutual funds?

As the government is forced to further bring down the rates on assured return schemes, except for a few subsidies to senior citizens, investors will be forced to look at equities. At such a point, mutual funds will be considered the safest option for investors. We are already witnessing sips on the rise. But the proportion is still small compared to the overall AUM size of the industry. If you ask me, the best way to enter equity is through sips. You don't try to time the market, so it's a healthy way to built investments.

As far as equity schemes are concerned, existing schemes have not received large money in the current financial year-most money has actually moved out. In fact, equity as an asset class has only grown through new fund offerings. As for debt schemes, 65-70 per cent of the corpus is held by corporates, and the rest by HNIs; retail portion in debt is very small.

Given this scenario, what is the retail response to sophisticated products being launched by MFs?

Retail investors are yet to understand an equity product. Only when financial literacy rises, will investors look at new products. However, the need for such products among the HNI and the mid-HNI investors has seen mutual funds launching sophisticated products. For example, our own short-term debt product is mainly for corporates.

Why is the retail interest in debt poor? Primarily because of the administered interest rate. The return of debt is market-linked, which is 200 basis points lower than the assured rate of returns. Even in equity, we are yet to see long-term money coming in. It is not that our investors are not open to long-term investing-they buy seven-year Kisan Vikas Patras and NSCS-but when it comes to equity, the tendency is to continuously book profits.

What do investors prefer-dividend or growth options?

The Indian investor psychology has been such that the investing pattern is less than one year. Therefore, investors prefer the dividend option. As an industry, only 25-30 per cent of the assets stay invested beyond one year; the remaining 70-75 per cent of money is being churned.

NEWS ROUND-UP

Flat With A View

Barker's apartment: Should you invest in the like?

If you want real estate investment with a twist, try buying a service apartment. There's been quite a boom in the business in recent years, given that these are a more convenient and cheap alternative to hotels. "It's like staying at a home away from home," says Elizabeth Barker, here (in Bangalore) on a six-month contract as voice and accent trainer at a leading business process outsourcing firm. Given the cost and shortage of hotel rooms, more visitors are opting for service apartments.

Builders have quickly cottoned on to this, and high net-worth individuals and second apartment buyers are choosing to put their money here. Take, for example, Kolkata-based IT executive Debashish Bhattacharya, who built a three-storied house at Rajarhat in 1996-97. He now stays in a company-provided flat, and has turned his house into a service apartment. Says Ninge Gowda, who runs a service apartment complex in Jayanagar, Bangalore: "Investments in service apartments typically yield around 15-20 per cent per annum-apart from the capital appreciation on the real estate."

However, it works best for investors who want a long-term investment and are fine with it not yielding fixed monthly returns. Your typical investor today is the young, high net-worth, second-home buyer who likes the intermittent high returns and the scope for capital appreciation. Don't take the plunge, though, without first doing your homework, especially since there are only a few credible players. As S. Subramanayam, MD, Ascent Securities, says: "Be careful about who you invest with. The developer's track record must be examined. Conventional builders might not be the right choice, as they might not have the skill sets required to run a service apartment." So there.

-Venkatesha Babu

Give Us A Tax Break, Minister

Investors can earn more this year if finance minister P. Chidambaram agrees to demands for reintroducing tax exemptions on interest income from deposits. The Indian Banks Association has asked that interest income from deposits be included under Sec. 80C deductions that now cover insurance, equity linked savings schemes and the like (see table below). Depositors, who have seen interest rates sliding sharply, have long pleaded for this. Now, bankers join them, as scorching credit growth has outpaced growth in deposits. "Deposits must grow to support infrastructure investment and industrial growth," says R. Balakrishnan, Executive Director, Andhra Bank. How about hiking deposit rates? "That would entail increasing lending rates," warns the CEO of a public sector bank. At least the exemption then?

-Anand Adhikari

Mahilanivesh: "A simple STP for women"

What's In It For Women?

Mahilanivesh is a women-centric scheme from ING Vysya Mutual Fund, only it doesn't seem to have anything specifically useful for women investors, except that only they are eligible to buy units. Money is invested in ING Vysya's Floating Rate Fund and then automatically transferred each month to the Dividend Yield Fund. Says Paras Adenwala, CIO (Equity), ING Vysya Fund: "It's a simple STP (systematic transfer plan) and, as women are conservative investors, we chose a dividend yield fund." If that's all, then women can certainly look further. Dividend yield funds are low-risk but returns are lower too. Second, with stock prices at an all-time high, yields will be lower and capital appreciation restricted. If it's STPs you want, do check out other products as well.

-Mahesh Nayak

Rating Debate
Risk is inherent to equity. How much can you magic it away?

Rating IPOs: Is that really the way to go?

Understandably alarmed by the vastness of the slowly unfolding initial public offerings (multiple applications and the like) scam, the Securities and Exchange Board of India (SEBI) recently announced plans to introduce ratings for IPOs. While SEBI's motive of investor protection is worthy, are ratings really the way to go?

SEBI has said the rating, to be made voluntarily, will cover promoters, the track record of the management, and past performance, will not comment on issue pricing, and will be disclosed (prominently) in the offer document.

The problem is that risk is intrinsic to equity investment, and to imply that a rating could somehow lessen this risk might be dangerous. Says K.E.C. Raja Kumar, CEO, UTI Venture Funds Management, formerly a regional manager with SEBI: "Rating IPOs is not a practical idea. Ours is a free market and enough research houses publish independent views on an IPO-whether it's fairly priced; its potential etc." Also, the proposal leaves some questions unanswered: What, for instance, if the issue is rated high but fails at the bourse?

Others argue that a rating system will distil fundamental information for the investor. However, as Kumar points out: "Ratings can give investors a false sense of safety." The least investors can do is read offer documents and company reports carefully.

What's the alternative? Says Kumar: "If marque venture investors or private equity investors are associated with the company pre-IPO, it can be presumed that the issue quality is good. Venture-backed IPOs have performed better than others in developed markets."

Now, SEBI is talking about rating brokers as well. This move will probably prove more crucial for the retail investor, given the vast number of shadowy entities out there, but here too experts point out that categorising brokers into A or B groups might work better than straightforward ratings.

-Vaishna Roy

Value-picker's Corner

SRE I INFRASTRUCTURE FINANCE; PRICE: Rs 63

Set up in 1989, SREI infrastructure finance survived the mid-1990s when several private non-banking financial companies closed down. Today, it's the market leader in infrastructure equipment finance, with three businesses-equipment finance (lease and hire purchase), project finance, and renewable energy product finance. The last is a high growth segment, and SREI is among the first companies here. SREI finances only green (like solar) energy systems and started QUIPO, India's first infrastructure equipment bank. Undervalued compared to peer IDFC, SREI is trading at a low price equity multiple of 14.36 versus IDFC's 20.29. The corresponding EPS figures are Rs 4.38 and Rs 3.48, respectively. Priced at Rs 63, the scrip has the potential to treble in about two years.

-Sahad P.V.

Prime Database's Haldea: Looking forward to another hot year

Trend-spotting

Here comes another hot year for IPOs, with market watchers predicting that around Rs 45,000 crore will be raised from the primary market in 2006. According to Prithvi Haldea, Managing Director, Prime Database, a substantial portion of this will come from the government diluting its stake in public sector firms and fresh issues. Says S. Ramesh, Executive Director (Equity Product Group), Kotak Mahindra Capital: "I expect offerings from companies with sound track record, and of reasonably sized floats." Small issues are unlikely, given the lack of support from investment bankers, but expect listings in diverse sectors like capital goods, lifestyle products, entertainment, food, food processing and healthcare.

-Mahesh Nayak