For local savers these are not so pretty times of uncertainty; and for all the obvious reasons. Investment avenues, ranging from gold and bonds to stocks, have become one of those oft-discussed topics in drawing room conversations that often leave participants scratching their heads.
But not everybody can buy gold; even those who have the cash seem to be thinking twice given that the yellow metal is at a dizzying height these days. In local market options, therefore, money market funds seem to be the best bet.
Attribute it to investors falling risk appetite, or to the lack of investment avenues, money market mutual funds have outperformed the lot by a far margin.
According to the latest mutual fund investment guide released by InvestCap Securities, money market funds grew by 7.7 percent month-on-month in August versus a decline of 4 percent and 6.7 percent in income and equity funds respectively.
Comparisons with the start of the calendar year are even more exciting. Data compiled by InvestCap shows that money market funds (MMF) grew by 161 percent year-on-year in the first eight months of CY10, as against a fall of 14 percent and 45.5 percent in income and equity funds respectively.
"The key factor behind this is that money market funds have less credit risk, liquidity risk and also less interest rate risk compared to other available asset class funds," argues Nasim Beg, CEO of Arif Habib Investments, adding that lack of investment avenues in the face of defaulting TFCs, and rising government borrowings is also a driving factor.
Aside from MMFs safe-haven, another factor - especially for corporations that have sold Rs15.4 billion worth of equities since January - is its tax-haven nature as return on mutual funds do not form a part of companies taxable income.
"Even if companies invest in MMF for less than six months, their return is only taxed at 10 percent (the WHT), whereas if they invested in bank deposits for the same time period, their interest earnings would be taxed at 35 percent, including the 10 percent WHT," a mutual fund manager said.
Lured by this tax exemption, industry voices suggest that corporations have been pouring their liquidity heavily in money market funds of late. And from the look of things, more money is likely to be poured in MMF, which is seen growing at a rate of 25 percent per annum according to one fund manager.
The current economic situation suggests that "the discount rate will be going up further, as a result of which benchmark PIB yields can be expected to rise further by 1-2 percentage points," says Beg.
That, and lack of corporate debts issues, risk-shy fund managers and the governments increasing reliance on domestic sources for the ever-ballooning budget deficit amid higher rates ahead makes a strong case of further money pouring in the MMF.
In the 90s, higher interest rates attracted government borrowing (read NSS) and the trend is likely to continue in 2010s. But unlike the 90s, the avenue of mutual funds might attract some of the private savers money which might have gone elsewhere, mainly to the NSS.
So, if gold seems out of reach, money market funds may just be the safe-haven youve been looking for.
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