Addressing a conference organised by the Merchants Chambers of Commerce in Calcutta on Monday, Srinivasan said that combining four major characteristics of safety, liquidity, post-tax returns and convenience, mutual sector funds are expected to grow steadily over time.

"It is unfortunate that in India almost 46 per cent of the household savings is invested in banks whereas 18 to 19 per cent is invested in life insurance schemes. In fact, lack of large institutional players like banks and financial institutions investing in mutual funds have restricted growth", felt Srinivasan.

"The structure of the mutual fund is such that it offers more protection which an investor may opt for. However, in India, the mutual fund industry is only Rs 1 lakh crorecompared to Rs 7 lakh crore in banks, Rs 2.10 lakh crore in pension funds, and Rs 2 lakh crore in insurance", he said.

Explaining the benefit of mutual fund schemes, he said that real returns are more important, which is not much evident in savings in banks or in insurance which is more of an expenditure rather than an investment. Drawing parallels with the US mutual fund market, Srinivasan pointed out that the MF industry is almost 10 times India's gross domestic product at Rs 14 lakh crore.

Highlighting the benefits of open-ended schemes, he said that they had certain inherent advantages including better liquidity conversions, easy nature of transactions, risk diversifications, flexibility, transperency and tax benefits.

"No investment is risk-free. Debt funds may have their own set of credit risks, interest rate risk, and a problem of liquidity, whereas, for equity schemes there may be a mismatch between fund objective and investment objective, a problem of timing the market and an inherent marketrisk", he added.

In the next few years, the rising trend in mutual fund investment will offer a stiff competition to the banking sector if the present regulatory framework is a little improved. Deposits crossed Rs 21,000 crore in 1998-99 as compared to Rs 18,700 crore in the previous year, taking the total assets under the management of the mutual fund industry to over Rs 70,000 crore.

A break-up of the funds collection in 1998-99 shows that 60 per cent of it came through income or debt schemes, and the balance 40 per cent through equity schemes. Although the contribution of the private sector mutual funds has gone up substantially with an annual growth rate of over 60 per cent, UTI continues to attract the highest amount with over 60 per cent of the total collection, mainly because of its assured return schemes.