The government’s unexpected move to withdraw high denomination Rs. 500 and Rs. 1000 bank notes is expected to be a boon for India’s mutual fund industry. As per available estimates, Rs. 50,000 crores is expected to flow into India’s MF industry as a result of the demonetization move. These inflows are expected to occur in the next couple of months as the liquidity of banks is expected to increase as Indians deposit their old currency notes into banks and daily/weekly withdrawal limits continue to stay in place.
Apart from the increased liquidity in banks, another factor that is expected to spur MF investments are increased investments by individual investors. In theory, individual investors would prefer the higher returns offered by mutual funds as compared to the much lower 4% ROI offered on savings account deposits. On the other hand, potential large investors such as banks are not allowed to invest over 10% of net worth into various liquid mutual fund schemes hence, market inflows are expected to be limited. Thus the total inflows are estimated to be as low as Rs. 50,000 crores even though the demonetization move is expected to bring approximately Rs. 8 to Rs. 12 lakh crores into India’s banking system.
The mutual fund segment is expected to witness the highest investment is liquid funds, which are preferred by companies and banks. At present, liquid funds account for Rs. 2.7 lakh crore of India’s mutual fund industry, which is valued at Rs. 16 lakh crores and this share is expected to increase significantly in the short term. However, some analysts believe that these temporary inflows would have a limited effect on the industry in the long term as only a small fraction of these liquid fund investments would get converted to short-term or longer term investment options.