Fees vs deposits

Economy January 20, 2018 01:00

By Special to The Nation

DURING this ultra low saving rate, investors may find it hard to obtain a satisfactory return from their savings. As a result, it is not surprising if they turn to some alternative investments that may contain a little bit higher risk but can compensate them with higher return.



If we consider average return on investment of mutual funds over the past 5 years, they can range from –22 per cnet to +18 per cent per year. Compared to the return on bank fixed deposit savings, which can range from 1.34 per cent to 2.73 per cent , the rates of return on mutual fund investment seem a lot more attractive than placing deposit in a bank. 

These could be the reasons why mutual funds face tremendous growth with CAGR of more than 17 per cent over the past 5 years, which doubled total net assets of mutual funds from Bt2 trillion to more than Bt4.6 trillion in such short periods. 

But, are mutual funds and deposit products really substitutable? 

The important feature that sets mutual fund and deposit products apart is the risk investors must bear. For example, deposit products will not incur credit risk if the deposit amount does not exceed Bt15 million per customer per bank, while mutual fund products do have credit risk. However, if we consider only “fixed income” mutual funds, the top 10 funds with largest total net asset invest mainly in safe investments such as Bank of Thailand bonds and government bonds. Therefore, the credit risk is extremely low. Regarding liquidity risk, these fixed income funds also have low liquidity risk as investors can liquidate their assets whenever they want, though they may have to wait at least 1 day to receive proceeds from selling investment units. 

Obviously, there is still interest rate risk that could affect the value of any fixed income investments. However, since the Great Financial Crisis in 2008, major central banks have continually implemented loose monetary policies such as maintaining extremely low interest rate. As a result, global interest rates have been quite low and stable which lead to “seemingly” low interest rate risk for fixed income investors. 

So, it is possible that some investors assumed that deposit products and fixed income funds were quite substitutable. But, does that mean the capitals that otherwise should have been put in the deposit were invested in mutual fund instead? It is quite difficult to quantify the impact but we try to get some sense of it by looking from a macro view, such as comparing deposits to GDP and fixed income funds’ total assets to GDP. 

Prior to periods of flooding liquidity from central banks, fixed-income-funds-to-GDP kept rising in contrast to a declining deposit-to-GDP ratio. But after persistent liquidity injection by central banks via large scales bond purchasing, ie Quantitative Easing (QE), appetites for fixed income market was intensified. This led to a continual growth in fixed income funds' total assets (CAGR of 11 per cent between 2008-2013). However, this time with abundant liquidity unlike the pre-QE era, deposits-to-GDP grew in tandem with fixed-income-to-GDP. 

Contributed by DUANGRAT PRAJAKSILPTHAI and POON PANICHPIBOOL. They can be reached at tmbanalytics@tmbbank.com

Views expressed in this article are those of the author and not necessarily of TMB Bank or its executives.