MFs To Gain With Financialisation Of Savings

India’s gross financial savings of the household sector has n hit a seven-year high figure in the last fiscal, as per the annual report published by the Reserve Bank of India. It exhibited that India’s gross financial savings touched 11.1 per cent of gross national disposable income (GNDI)in FY18 from 9.1 per cent in the last fiscal (FY17). Another interesting aspect of the financial savings of household sector was that the share of equity shares and debentures within the financial savings has increased from 0.2 per cent of GNDI in FY17 to 0.9 per cent in FY18. Despite such increase in the share, it is lower than the share of 1.9 per cent that goes into insurance funds. 

Investments in mutual funds still lag behind insurance. The penetration of mutual fund, although increasing, is mere four per cent as compared to 25 per cent of insurance. Going ahead, we see the gap to narrow down with the increase in the financial savings. This is because the inflation has been low, which makes real interest rate higher and hence financial savings become attractive as compared to the physical assets. Mutual funds are likely to attract most of the investments because of their competitive edge over other financial assets especially for novice investors. However, some of the insurance products such as unit linked insurance plan (ULIP) also compete with mutual funds, which might attract some of the mutual fund investors. This has increased particularly since the last budget, which made ULIPs more tax-efficient. 

Nonetheless, we believe insurance and investment should not be mixed and should be done separately. Our cover story this time goes into the details to explain the reasons for keeping them separate. The return offered by separating insurance and investment is higher than the return offered when these are mixed together. We have also covered various traps used by insurance companies and their agents to lure you into investing in ULIPs. 

Hope our story will help you to take wise financial decision.

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