SMALL investors are in search of better rates of return in flexible modes of investment. However different classes of savers have mainly three avenues — banks, National Savings Schemes and mutual funds, to chose from depending on the nature and size of their investment.

Rates of return on saving and fixed accounts of banks have been on the decline for over two years due to monetary policy easing. But as banks are bound to maintain a minimum deposit rate (MDR), linked with the policy rate, depositors now know that their banks cannot cut rates arbitrarily.

Besides, in the presence of an MDR and due to stiff industry competition, some banks have come up with deposit schemes with relatively higher rates of return and others have added additional features to them like borrowing facilities using the deposits as a sort of collateral.

By and large, banking products for small savers have improved, making them more competitive against NSS, bankers say adding that this has happened because NSS rates of return have also been rationalised.

“When we talk about those using bank accounts, national saving schemes (NSS) and mutual funds we are actually talking about three different classes of savers/investors,” says a senior official of Mutual Funds Association of Pakistan.

“In most cases, people using bank accounts and NSS for savings are not real investors at all; they are savers. But those investing in mutual funds are”, he says. “Though security of the principal amount is dear to both savers and investors, the latter is always in search of a real high return.”

“When we talk about those using bank accounts, National Savings Schemes and mutual funds we are actually talking about three different classes of savers/investors”

But analysts point out that whereas mutual funds are increasingly attracting small investors with their mostly double-digit annualised rates of return, bank deposits are mainly growing due to economic growth and as a result of the state’s drive to document the economy. “So, it becomes difficult to assess what aspects of bank deposit products are actually attracting small investors or any class of investors at all,” says a senior executive of National Bank of Pakistan.

One way of looking at it could be that we assume that growth in fixed deposits of banks particularly the deposits below Rs500,000, at least, reflect the mood of small investors. First of all, fixed deposits of banks make up only 22pc of the total and deposits below Rs500,000 constitute less than 8pc of the total bank deposits as of June 2015. “Over the years, there has been no significant change in this percentage,” says a central banker.

A basic reason for this phenomenon is that banks offer too little on even fixed deposits of 1-5 years are slightly less than the comparable NSS products and far below the annual returns of mutual funds.

Besides, investors have many choices at mutual funds to choose from different type of funds and the easier schedule of exit. And, at times they get tax rebates on income from mutual funds units. Such things have made mutual funds more popular among small investors.

The NSS products of three, five and 10 years also have been growing but not as fast as mutual funds with the only exception of the two products meant exclusively for senior citizens and widows.

Switching over from one mode of investment to another depends primarily on the level of awareness about the market.

At banks, people just put their savings considering the security of the principal amount and their need to set aside the money for a certain period. More or less the same is true for NSS products which generally offer higher returns compared to banks.

With savers’ growing awareness, investment in the NSS products has increased from Rs235bn in FY11 to Rs337bn in FY15. This growth may continue as hundreds of thousands of small investors particularly in rural and semi-urban areas are all too familiar with the NSS products than talking to smart guys at mutual funds offices,” according to a senior banker.

Contrary to bank deposits and NSS, mutual funds attract investors mostly from financially more literate class either because of marketing via banks and brokerage houses which own these funds or because initial investors have some exposure to stock market, analysts say.

Shariah-compliant mutual funds are also attracting small investors and are doing far better than deposit schemes of Islamic banks or Shariah-compliant saving products of conventional banks.

That is perhaps why the open-end mutual funds have increased in number from 119 in CY11 to 164 in CY15 and their net assets nearly doubled from Rs224bn to Rs411bn during this period.

Published in Dawn, Business & Finance weekly, April 11th, 2016