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27 Dec 2005

Financial Markets

9M-05 Performance, '06 Outlook: RMFs & LTFs

คะแนนเฉลี่ย

Investments in money and capital markets this year have been rather flat. Incentives for investments in Retirement Mutual Funds (RMFs) and Long-Term Equity Funds (LTFs) have not increased. The government has not enacted additional tax benefits for investors, even though the private sector has requested raising the ceiling for tax-deductions on these investments from THB300,000 to THB500,000, or more than 15 percent of taxable income. As a result, the level of new investments this year will likely be almost unchanged next year. Still, given that most investors in these instruments are likely those in the high income bracket, similar to this year, rivalry among asset management companies will likely become more intense to retain market shares.

In 2005, Kasikorn Research Center (KResearch) expects that a greater number of investors may shift their investments from RMFs to LTFs. Even though total investments in LTFs totaled only THB2.216 billion over the first ten months of this year, new investments are expected to rise during the remaining two months. This means that decisions on investments will now largely depend on tax deductions, rather than return on investment. (Purchases of these funds should have increased when the SET index slid, if investors had considered their return on investment more carefully. However, larger purchases of funds are usually seen during the final month of the year when the SET index often rises.) As a result, new investments in RMFs will likely have exhibited slower growth this year, similar to what was seen last year. Net sales in RMFs over the first ten months of this year totaled THB1.483 billion, down 5.1 percent from the same period of last year.

KResearch forecasts that new investments throughout this year should be close to last year, or have increased moderately over last year. This is because existing investors are expected to continue buying funds to gain the highest benefits from tax deductions. Still, to enlarge the new customer base to middle-income earners, as well as encourage them to save as much as possible, may prove to be an uphill task. This is particularly true while investments in money and capital markets are exhibiting significant volatility, making returns on investment uncertain. Worse, the tax benefits this group of investors gain will be around 10 percent, which is less attractive than the tax breaks gained by high-income earners whose tax bracket is 20-30 percent.

Looking ahead into the year to come, KResearch forecasts that the economy should grow slightly by 4.5-5.0 percent over this year's projection of 4.2-4.5 percent, while inflation will likely decelerate with declining oil prices. As a consequence, consumer confidence and domestic spending should rise, possibly leading to increases of 1.5-2 percent in the 12-month fixed deposit rates of large commercial banks, from around 2.25 percent, this year. Meanwhile, the capital market is still uncertain about state enterprise privatization, which may affect investor confidence and the investment atmosphere in the market. The factors that could foresee the trend of investment in RMFs and LMFs in 2006 are as follows:
  1. The NAV of both funds should grow only moderately, and depend on the volume of new capital, in the same direction as 2005. LTFs will be so as a result of a rather stable SET index, thus not increasing prominently. For RMFs, the trend shows that the return on investment of fixed income funds is around 40 percent of that from RMFs, but this may fall to a negative value due to pressure from upward interest rate cycle.
  2. The volume of new capital, or the net sales value for LTFs in 2006 is expected to remain stable, or change only slightly if there is still no clear conclusion to state enterprise privatization. So, most capital will still come from the base of existing investors who have high incomes and are benefiting from high tax deductions. As for new investments in RMFs, it is projected that balanced funds will gain more popularity, and regain the highest proportion of investments again, while fixed income funds still be impacted by hikes in interest rates. However, the RMF net sales value in 2006 will likely increase moderately, because their return on investment is still not evident, and there are still no other motivations or additional benefits.

Therefore increasing the new customer base is still the only hope of asset management companies to retain the growth of RMFs. However, it will not be easy to see changes in the near future due to long-term fixed deposit savings making it difficult to access low-to-medium income customers who get lower tax benefits in their income tax bracket. In addition, asset management companies also have many general mutual fund products for investors to choose from, so it will not be necessary to increase capital only through RMFs.

LTF investments in 2006 will be different in that they will not have as many limitations as RMFs. So, it is projected that LTFs will still likely grow for at least two more years, until they gradually reach maturity on through to 2008, per the repurchase conditions set by each fund.

Financial Markets