Can Systematic Investment Plan be a superior alternative to DPS?

Illustration: TBS

The banking sector in Bangladesh claims that there has been a significant change in the way individuals and businesses manage their savings in recent years. Hitherto, the Deposit Pension Scheme (DPS) is still the preferred choice for many investors looking for a safe and dependable method of growing their money.

However, there are very negative or limited concepts about investing in Mutual Funds. Mutual funds in developed countries are one of the most popular investment tools. In the US, the size of the industry is larger than its economy. But Bangladesh is lagging far behind its neighbouring nations, such as India, in terms of the size of the mutual fund industry.

The ratio of Bangladesh's mutual fund assets to its gross domestic product (GDP) is only 0.4%, the lowest among the peer countries, representing the sector's exponential growth potential, which remains untapped. The current ratio of mutual fund assets is 16.2% in India, followed by 54% in Malaysia, 1.3% in Pakistan, 28.3% in Thailand, 6.6% in Vietnam, 195.7% in the US, and 180.8% in Canada. 

As of July 2022, the assets under management (AUM) of Bangladesh's MF industry, operated by 54 asset management companies (AMCs), stood at $1.6 billion, according to IDLC, an investment bank. In this context, the AUM of the Indian MF industry operated by 43 AMCs was $472 billion during the same period. AUM refers to the total market value of investments fund managers make on behalf of their clients.

The development of a Systematic Investment Plan (SIP) as a different channel for investing has sparked a growing desire among people and organisations to investigate this new approach. 

SIP, commonly referred to as mutual fund investing, gives investors a chance to make recurring instalment investments into a diverse portfolio of stocks, bonds, or other assets. Investors make a set contribution at regular intervals, usually monthly or quarterly, to maintain a disciplined approach to investing. This strategy has grown in favour in many nations since it enables people to enter the market with modest investments and reap the rewards of possible long-term profits.

One of the main benefits of SIP over DPS is the possibility of better profits. Due to the diversified structure of the underlying assets, SIP offers the potential for better returns, whereas DPS typically offers fixed interest rates, which may not always keep up with inflation. Professional fund managers oversee the money invested through SIPs to maximise returns for investors. Comparing this knowledge and active management to conventional DPS schemes might result in greater returns.

SIP's flexibility is a huge additional benefit. Investors pledge their money to DPS generally for a specified duration, which might be anything from a few years to several decades. However, with SIP, investors have the freedom to select the length of their investment and can terminate the plan whenever they like. SIP is a more alluring choice for those who like liquidity and desire the opportunity to modify their investment plan following their shifting financial goals, thanks to this flexibility.

In contrast to the source tax that is imposed on DPS, SIP holders have more freedom to use the tax rebate. In one tax year, a DPS holder is only eligible for a Tk60,000 tax rebate, although SIP has no such upper limit. Investors get the benefit of cost averaging using SIP as well. Investment values are subject to substantial swings in an unstable market. 

Regardless of the state of the market, SIP allows investors to purchase a certain number of shares at regular intervals. With the purchase price averaged out, short-term market volatility is lessened, which may lead to superior long-term profits.

It is crucial to emphasise the expanding investor interest while examining the potential of SIP in Bangladesh's financial industry. Particularly, the younger generation is more likely to invest in capital markets to meet their financial objectives. The demand for investment products that offer potential growth and diversification is increasing as the economy grows and the middle-class population rises. SIP fits these criteria well, offering financial organisations a viable means of luring and retaining clients.

Overcoming some of the obstacles standing in the way of SIP's increased adoption in Bangladesh, though, is necessary. Lack of information and financial literacy among the general public is one of the main obstacles. The advantages and possible drawbacks of SIP are still largely unknown to many people. 

Asset Management Companies (AMCs) should concentrate on teaching the general public about the idea, dangers, and advantages of investing in mutual funds if they want to promote SIP as a viable substitute for DPS. This may be done by conducting targeted awareness campaigns, workshops, and seminars that banks, in conjunction with regulatory agencies and business professionals, can organise.

Furthermore, regulatory frameworks must be in place to provide investor safety and uphold the market's integrity. To effectively regulate the mutual fund business, the Bangladesh Securities and Exchange Commission (BSEC) must create strict norms and oversight procedures. Transparent reporting, frequent audits, and stringent compliance regulations will cultivate investor confidence and strengthen SIP's reputation as a secure investment alternative.

SIP has a lot of potential as a DPS substitute in Bangladesh's financial services sector. Thanks to its potential for greater returns, flexibility, and capacity to meet the fluctuating demands of individual investors. SIP has the potential to transform the way people save and grow their money. 

However, to realise the full potential of SIP and make it a popular investment option in the country, awareness and education must go hand in hand with strict regulatory control. By adopting SIP and overcoming difficulties, banking institutions in Bangladesh can meet the changing needs of investors and support the expansion of the entire economy.

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.