An interest rate cut by the government in small savings schemes could witness higher inflows in mutual funds (MFs).

The government has reduced interest rate in small savings schemes, making investments in such schemes less remunerative. As things stand today, the central government mobilises approximately Rs 200 bn (on an average) annually based on the higher rates on its schemes. This was reported by a leading financial daily.

With a cut in rates on the saving schemes, some of these inflows are likely to get diverted away from government schemes to mutual funds. If one were to assume a scenario where even 40% of government's mobilisations are diverted to MFs, this could result in a burst of inflows into MFs to the tune of Rs 80 m annually. If one were to make liberal estimates, diverted inflows from government schemes into MFs could be on the higher side of Rs 100 m annually.

However, this burst of inflows is unlikely to benefit all MFs evenly. For one, by and large most MFs have a marketing setup in large cities and towns and have ignored the smaller ones. Very few MFs (like bank-sponsored MFs, public sector MFs - GIC, LIC, UTI) have a presence in the small towns which accounts for a significant portion of the government mobilisations. So inflows from these areas will accrue only to those MFs which have a setup in place in these areas.

Also, a large portion of the investors who invest in government savings schemes are the conservative type who are looking for a steady source of income in the form of interest on their savings. So assuming these investors migrate to MFs, they will continue to invest in income/g-sec funds, which offer them stable returns just like the savings schemes. It will be a while before these investors decide to put money in growth (equity) schemes.

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