Lower interest rates send unit trust industry’s assets over Rs.200bn

As the historically low interest rates upended the asset allocation decisions of people and firms alike, the mutual fund industry stood to benefit immensely out of that phenomenon, as its assets under management (AUMs) soared to over Rs.200 billion by end-March, rising by nearly twice within a span of a year. 

According to the latest data available through March 2021, the industry’s total AUMs, which were at Rs.113.8 billion at the beginning of 2020, soared to Rs.190.5 billion by end-2020 and further above Rs.200 billion by end-March 2021, making the sector one of the biggest winners of the low interest rates in the economy.

With this faster growth in assets, the sector improved its size by way of improving its share in the total financial system from 0.6 percent in 2019 to 0.8 percent in 2020.  

This marked nearly a 70 percent increase in AUMs within a single calendar year and more than 100 percent increase in AUMs from the year from April 2020 through March 2021, the highest in its history and the most in any other asset classes during the same period. 

For instance, even the licensed commercial banking sector, which accounts for the lion’s share of 54.4 percent in the entire financial system, saw its assets growing by 17.2 percent during the year, although in absolute terms, it added nearly Rs.2 trillion worth of assets, due its outsized nature. 

Analysing the behaviour of monthly assets in the five largest unit trust funds in the industry, Mirror Business recently showed how they had grown in assets in the first three months through March.

Although there was some decline in assets from March to May last year, due to the withdrawal of funds to meet the working capital and consumption needs of unit holders, the industry turned to an immediate upwards path, due to the decline in yields in the bank fixed deposits.

Individuals who hold their retirement savings in bank accounts and specially the banks and corporates looking for alternative investment opportunities to park their excess liquidity in high-yielding assets, found an opportunity in unit trusts.

The leading unit trust funds recently showed their returns, which are often relatively higher than what a bank offers to a time deposit, in a bid to lure more assets from elsewhere into the industry. 

For instance, one of the top five funds said it delivered nearly 12.0 percent annual return to its unit holders through end-March, nearly twice the rate a bank offers for a fixed deposit. 

“Meanwhile, share of retail deposits show a decline possibly as a result of deposit holders switching to riskier but higher yielding assets such as equities. More risk-averse depositors such as retirees have opted to stay put and lower real returns have undoubtedly affected their welfare level,” credit rating agency ICRA Lanka said weighing in on the development.