Investment in MFs, insurance surged during demonetisation

While Prime Minister Narendra Modi’s historic announcement of scrapping high denomination notes led to an acute cash crunch since November 9, investment in insurance and mutual fund schemes surged as cash transactions in other assets such as real estate and gold were crimped.

While Prime Minister Narendra Modi’s historic announcement of scrapping high denomination notes led to an acute cash crunch since November 9, investment in insurance and mutual fund schemes surged as cash transactions in other assets such as real estate and gold were crimped.

Prime Minister Narendra Modi in the Lok Sabha in New Delhi on Wednesday.(PTI)

Investment in mutual funds jumped 37% and insurance premium payment was up by 31% during April to February 2016-17, data from financial regulators show.

What is surprising, the growth in investment in both mutual funds and insurance schemes has been stupendous in November, when the ban on Rs 500 and Rs 1,000 notes came into effect.

SEBI data show mutual funds witnessed inflows of Rs 1,00,760 crore between November 2016 and January 2017, as compared with an outflow of Rs 31,190 crore during the same period a year ago.

Assets managed by the Indian mutual fund industry have grown 37% year-on-year to Rs 18.48 lakh crore in February, latest data collated by Association of Mutual Funds in India show.

The demonetisation drive led to a fall in bank deposit rates, which prompted investors to park Rs 52,000 crore in debt schemes of mutual funds in the three months to January 2017. Investors had pulled out Rs 53,550 crore out of debt funds during the same period a year ago.

“Reduction in deposit interest rates by banks after demonetisation enhanced the relative attractiveness of debt oriented mutual funds,” the Reserve Bank of India said in a report titled “Macroeconomic impact of demonetization—a preliminary assessment.

Separately, Insurance Regulatory and Development Authority of India (IRDAI) data reveals that investment in insurance policies jumped 113% to Rs 16,100 crore in November, 18% in December and 27.8% in January. The first premium collections, however, fell 4.5% in February.

Still, the total investment in insurance schemes jumped 31% to Rs 1.4 lakh crore during April-February 2016-17.

“Premiums collected by life insurance companies more than doubled in November. Premiums collected by Life Insurance Corporation of India (LIC) increased by more than 140% in November 2016 as compared with less than 50% by private sector life insurance companies,” the RBI report said.

Prime Minister Narendra Modi’s historic move to scrap old Rs 500 and Rs 1,000 notes on November 8, led to a mad rush at banks for depositing close to Rs 15.44 lakh crore or 86% of the currency in circulation.

A significant portion of the deposit has found way into the capital market through mutual funds, insurance and pension funds, analysts say.

Most important, the domenetisation slowed investment of black money in gold and real estate, forcing many Indians to look for high-yielding financial assets like equity mutual funds.

“Demonetisation has accentuated this trend as some return seeking flows have been diverted from other areas of the economy to the equity market,” Jefferies said in a recent note.