MANY investors are eying stocks and mutual funds while showing less enthusiasm for gold as return on bank deposits declines and the National Saving Schemes lose their lustre. Some are also tempted to store dollars.

Stockbrokers, mutual funds managers, gold merchants and officials of forex companies all agree that the increased awareness among investors have lately led to quicker shifting of assets from one mode of investment to another.

“Even National Saving Schemes are no exception and we have to readjust profit rates on quarterly basis keeping the investment market conditions in mind,” said an official of the Central Directorate of National Savings.

But banks have rather a captive clientele in that all segments of the economy have to go through the banking channels while transacting business with each other. Similarly, banks have deposits of all kinds.

The current buoyancy at the stock exchanges has attracted funds because of comparatively improved returns. Investors who held their choicest stocks and units of mutual funds for at least two quarters not only earned a handsome dividend but also made decent capital gains, say securities analyst.

Generally, investors remained hooked to the highest dividend paying companies of fertiliser, chemicals, power generation, banking and oil and gas sectors.

Despite higher profitability and dividends, banks’ average rate of return on fresh deposits (excluding deposits earning zero mark-up and excluding transactions of interbank market) fell from 9.52 per cent in June 2011 to 7.69 per cent in May 2012. Bankers justify it saying that during this period the State Bank of Pakistan’s key policy rate was also cut by two percentage points (from 14 to 12 per cent).

But their argument sounds hollow for two reasons .“First, the policy rate has no automatic relationship with banks’ deposit rates. And second, banks could have argued on this relationship had they also reduced lending rates in proportion to cut in policy rate,” says a former executive director of the SBP.

Banks’ average interest rate on fresh loans (minus zero-rated lending and minus interbank transactions) showed a slower decline than in the case of deposit rates, from 14.92 per cent in June 2011 to 13.51 per cent in May 2012.

“This phenomenon (steeper fall on deposit rates and slower decline in lending rates) explains how banks manage to keep banking spread high to earn profits.”

Banks are making the bulk of profits by investing depositors’ money in zero-risk government securities and not by sufficiently employing it in private sector’s development and business activities.

“It becomes even more important for banks to readjust lending and deposit rates judiciously.”

Some small and medium-sized banks either did not cut their deposit rates in FY12 or reduced them only slightly but that could not benefit the majority of bank depositors. The reason is top five large banks still hold about 53 per cent of the overall banks’ deposits.

In the outgoing fiscal year mutual funds offered handsome returns as asset management companies capitalised on an enlivened stock market and profitable banking industry. Dozens of open-end mutual fund schemes catered to all kinds of investors and many of them earned for their unit holders double-digit returns in a single year—which in many cases exceeded the interest rates on long-term National Savings Schemes. Islamic open-end schemes also attracted a large number of investors.

Though institutional investors were the biggest beneficiaries, a large number of individual investors also profited from phenomenal growth in mutual funds.

Officials of Pakistan Mercantile Exchange say investment in gold has been on the increase after global recession of 2008-09 as people rediscovered the yellow metal as a store of value and a better hedge against inflation than many other tools of investment.

“That trend continued through 2012 as we came up with new investment schemes in gold for medium and small investors. Investors were offered the opportunity to buy and sell 10 gram of gold,” a PMEX official told Dawn.

Whereas the PMEX provides a trading platform for relatively educated and computer savvy investors, public rush on physical gold also continued in FY12 though the pace of investment was not as high as in FY11. Chairman of All Sindh Jewellers Association Haji Haroon Rasheed says that those who had invested in the precious metal between FY09 and FY11 offloaded their holdings for profit taking in the last fiscal year. And the bulk of gold thus sold in the market was bought up by jewellers for manufacturers exportable jewellery.

That also explains at least, in part, over 100 per cent increase in export earnings of gold jewellery. “Besides, we saw investors shifting from gold to stock market and for dollars particularly in the second half of the last fiscal year.”

Dollar had lost much of its charm for local investors after fiscal year 2009 when the rupee had plunged 20 per cent against the US unit providing people a very profitable mode of investment. In FY10 and FY11 dollar-buying for investment purposes remained negligible.

“But from January to June there was a rush on dollars as rupee depreciated,” said head of a Karachi-based foreign exchange company. “But I’d say investment in foreign currency represents hardly a fraction of overall investment volume and that too relates more to speculation.”

“People hardly deposit money in banks nowadays solely for investment purposes as they used to do in 1970s and 80s when financial market was not as developed as it is today,” according to a senior executive of state-run National Bank of Pakistan. And banks continue to exploit their captive clients due to weak enforcement of competition laws.

This is evident from the fact that by end of 2011, about one-third of the total profit-and-loss sharing deposits of all banks were yielding five per cent or even lower annual return, according to latest data released by SBP.

“Investors would have a real good time when all factions of financial market would acquire some depth. Though mutual funds (for example) are growing but their total size (of Rs300bn plus) is far below that of the deposit base of even a mid-sized local bank,” remarked an official of Mutual Funds Association of Pakistan.