Mutual Funds: Boon for the Rich: Disaster for the Country
By
Col(Retd) Bhaskar Sarkar VSM
“Mutual Fund Sahi Hai” (Mutual Funds are the right investment) is the theme of numerous advertisements on all TV channels both English and vernacular. These advertisements are targeting millions of ordinary Indians and advising them to invest in Mutual Funds. In one of the advertisements we have two young women chatting in a beauty parlour. One is telling the other that she was able to sell her scooter and buy a car because she has a SIP or Systematic Investment Plan for investing in Mutual Funds. I am not an economist but know a bit of arithmetic. Since the young woman had been riding a scooter, her monthly saving could not have been more that Rs 2000 or 24,000 per year. With 20% return (which is almost impossible over a long period), she would have Rs 29,000 per year. It would take her 10 years to accumulate the 3 lakhs Rupees needed to buy a small car. If she had opened a recurring deposit for the same amount in a bank or deposited Rs 24,000 per year in Public Provident Fund (PPF), she would take almost the same time to save the Rs 3 lakhs. That too without any market related risks.
Advertisements sell dreams. They target the greedy and the gullible. Modiji sold us the dream of getting Rs 15 lakhs per family and seeing “Achchhe Din” (enjoyable days). We voted him to power. All know that the money will not come. Most, except for Hindu fringe groups and cows, are still waiting for jobs and Achchhe Din. Fairness creams and deodorants are selling romantic dreams and we buy them in millions. We would be healthier if we spent the money on improving our diet instead. We happily hand over our hard earned savings to crooks who promise to double it in three years or promise to get us jobs and go crying to police stations when they disappear with the money. We buy gold bricks at throw away bargains and cry foul when the brick turns out to be made of brass. The list of our foolish deeds is endless. The advertisements urging ordinary Indians to invest in Mutual Funds are a great success. Indian Mutual Funds collected Rs 7115 crores in March 2018 from the ordinary Indians. That is the amount of our saving that is going into speculation or gambling every month instead of being spent on development.
This article seeks to examine if Mutual Funds are really the ideal investment for ordinary Indians and the country.
Understanding Mutual Funds
Stock markets have been around in the world for more than a century. Gambling instinct and greed is strong in most male human beings. It is natural for them to want to make a quick buck. I tried to make a quick buck on the stock market in 1992 with my retirement gratuity. Behaviour of markets is as difficult to understand as a woman’s mind. The smart and the lucky make money. Fall guys like me who are the majority lose a lot. It happened to many Americans in the Great Crash of 1928 and other crashes thereafter. I lost all in the Harshad Mehta scam of 1994.
As understanding markets was difficult and dealing with brokers cumbersome, small investors needed an expert to handle investments on their behalf. This need was filled by Mutual Funds, which are financial companies who collect money from small investors and invest the same in share market or debt market. Profits they make are shared with the investors. If no profits are made, the investor gets nothing. The small print on all contracts say, “Investments are subject to market risks, please read offer documents carefully.”
Mutual Fund was first introduced in India in 1963, when the Government of India launched Unit Trust of India (UTI). UTI remained the only Mutual Fund until 1987, when State Bank of India and other government-controlled Indian banks and financial companies established their own Mutual Funds. Soon Private Sector Banks also joined the lucrative, risk free, money making business. By 2013, there were 46 Mutual Funds in India. These Funds had about 11,850 schemes in Dec 2015. The total investment in these schemes in March 2018 was about Rs 22.71 lakh crores.
Market Penetration
Indians have a very high saving rate of almost 40%. Thus Indian’s save lakhs of crores every year. This money is coveted by the Mutual Funds. More the money that is chasing the same number of shares, higher the share prices and higher are the profits of Mutual Funds. A bull run on the stock markets has lasted about 9 years from 2008 to 2017. So returns have been good. Funds and investors have both made good money. This has encouraged people to invest in stock markets. The Funds are wooing the investors with round the clock advertisements. More and more ordinary Indians are being lured into the risky world of stock markets.
Government Incentives
Governments round the world tend to support speculation on the stock markets. What would the billionaires and millionaires do with their money if there were no stock markets? The governments are of the rich, by the rich and for the rich. They like to spend lakhs of crores on bullet trains and expressways and not on rural water supply, public health or education. Hence investors in stock markets enjoy many benefits not available to investors in manufacturing or service industries or to the salaried class. Rising share prices seem to be a certificate to the government’s management of the economy.
Indian Government also gives many incentives to stock markets and Mutual Funds. For example, investors in some Mutual fund schemes get a tax exemption under sec 80 C if they have a lock in period of 3 years. Long term capital gains tax on shares and mutual funds is charged at a rate of 10% against at 20% for others. There could be other tax exemptions.
Dangers of Investing in Mutual Funds
Stock Markets used to crash every few years. Indian markets had crashed in 1994. Asian Markets had crashed in 1996. The Dotcom Bubble of 2000 and the Sub Prime Mortgage Crisis of 2007-08 brought down the US and world markets. Stock Market Indices have been rising the world over during the last nine years and profits have been spectacular. This is primarily due to the cheap money policies and low interest rates in the US, EU, UK and Japan. Whether the trend will continue remains to be seen. The going on the stock market has not been so good in 2018 which has seen share prices and indices come off their peaks.
There are many uncertainties in the world and in India. A new cold war has started between the West and Russia. The US and China have been sparring over trade issues, Taiwan and South China Sea. Middle East is on the boil. Trump has taken US out of the Iran Nuclear Treaty. A war between Israel and and Iran seems inevitable. On the domestic front, oil prices have zoomed to record heights and are heading upwards. There is political uncertainty as crucial elections approach. Communal and caste related tensions are at their highest since 1948. If the markets do go bust, the rich with their staying power will survive. It is the gullible small investors with less staying power and those who are investing with borrowed money who will suffer the most.
Why Mutual Funds Are Bad for the Country
Money that Indians save can either be kept in fixed deposits in banks, PPF, various Government Bonds or used to buy precious metals or start businesses in manufacturing or service sectors or invested in stock markets directly or through Mutual Funds. Money invested in stock market or Mutual Funds and invested in precious metals hardly generate employment. They do not produce goods and services we need. So we have to import our needs from China and other countries. They do not finance infrastructure projects in water supply, irrigation, public health and education which are essential for ordinary Indians to survive and be comfortable. Can you imagine what the Government of India could do to improve our infrastructure and to create jobs if it had Rs 22.71 lakh crores which lies with Mutual Funds at its disposal? Mutual Funds at best enrich the rich. They are a disaster for small investors when markets crash. They are a disaster for the country because money needed for development and generating employment is being diverted to a totally unproductive business which is designed to enrich the rich.
Government Must Channel Savings into Banks, PPF and Government Bonds
As per World Bank data (see Bibliography) India’s gross domestic savings as percentage of GDP was 28.9% in 2016. The GDP in 2016 was about US $ 2264 billion. Thus the gross domestic savings per year works out to be about US $ 600 billion or about Rs 3.9 lakh crores. If this money could be channelled into banks, PPF and government bonds instead of into cash in lockers, private financial companies and Ponzi schemes, share market, Mutual Funds and precious metals, there would be no dearth of money to develop our infrastructure, create new Public Sector Companies to provide cold storages, develop our own internet services, manufacture mobile phones, computers and laptops and defence equipment under licence and create billions of jobs.
To do that the Indian Government must formulate policies which encourage people to put their savings into PPF, banks, government bonds and not into stock market, mutual funds or precious metals. I recommend the following measures.
Firstly make all interest incomes from bank deposits and government bonds tax exempt. PPF interest is already tax exempt. This will encourage people to put their savings in banks and government bonds. Banks will get recapitalized without tax payers money. Money in banks will be available for manufacturing and service industries and to the central and state governments.
Secondly, make it mandatory for all to declare all their primary gold and silver (bars, biscuits and coins) holdings on their income tax returns.
Thirdly, put a transaction tax on the stock markets @ Rs 1 per 1000 on each transaction. Long term capital gains tax should be made 20% as for others. Exemption under Sec 80C given to investments in Mutual Funds should be immediately withdrawn.
Conclusion
Mutual Funds “Sahi nahi hai.” Investment in Mutual Funds does not create jobs. Investment in manufacturing or service industries do. Money in banks is available to industry and to government for developing infrastructure. Government must discourage investment in Mutual Funds and encourage saving in banks, government bonds and special purpose bonds.
I consider PPF in State Bank of India to be the best investment for my young readers. It gives 8% tax free return. You have to deposit a minimum amount of Rs 500 to a maximum of Rs 1.5 lakhs every year to keep your account active. The amount is deducted from your gross income to arrive at the taxable income. If you forget, you can reactivate the account by paying a penalty of Rs 500. The lock in period is 5 years. After that you can draw half the balance in the account without assigning reasons every year. I admit that my son in law does not agree. But then he is neither young nor an ordinary small investor.
Investing in PPF is a better display of patriotism than singing “Vande Mataram”. You can do both.
Lastly! What you save is your money. Please feel free to do whatever you want with it.
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