Fixed Deposit: Why are small investors ditching bank FDs for mutual funds?

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Mutual funds offer several investment options across equity, debt and hybrid schemes. Representative image

Declining interest rates seem to be pushing small investors away from fixed deposits towards equity markets. A recent SBI Research report said that since the last year, the number of individual investors in the market increased by a whopping 142 lakh in FY21, with 122.5 lakh new accounts at CDSL and 19.7 lakh in NSDL. As many as 44.7 lakh retails investors were added during the two months of the current fiscal.

The Reserve Bank of India (RBI) has maintained a low interest rate in order to boost growth and help the economy recover from the impact of the Covid-19 pandemic and subsequent lockdowns. However, this has resulted in banks cutting the interest rate offered on fixed deposits. In view of this, small investors investing in bank FDs for guaranteed risk-free return are shifting to equity and debt funds to earn a higher return, despite the higher risk, says Archit Gupta, Founder and CEO, Clear.

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“Small investors have shifted from bank fixed deposits to mutual funds as FD interest rates are at historical lows. Moreover, these investors have realised that they may have to invest in mutual funds to get an inflation-adjusted return over the long run,” Gupta told FE Online.

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According to a media report, bank deposits crossed the Rs 150 trillion mark in March 2021. However, the banks could add only Rs 32,482 crore from 23 April 2021 to 21 May 2021 compared. During the same period last year, total deposits were Rs 1.2 trillion.

In contrast, equity mutual funds witnessed a 14-month high inflow of Rs 10,000 crore in May 2021, according to AMFI data. As of May-end, assets under management (AUM) of the mutual fund industry touched a record high of Rs 33 lakh crore.

Harsh Jain Co-founder and COO, Groww, “With the banks becoming more conservative on loans, most of them are struggling with higher liquidity. And therefore the FD rates have gone as low as 3% for retail investors. This has pushed a lot of people, who were earlier ignoring the capital market or were sitting on the fence and waiting for the right trigger, to diversify towards stocks and equity mutual funds.”

Jain said Groww has continuously seen a positive growth of retail/salaried class users for Mutual funds and specially SIP.

Mutual funds offer several investment options across equity, debt and hybrid schemes. Small investors can choose suitable mutual funds depending on their investment objectives and risk tolerance. According to Gupta, the Government has been consistently reducing small saving scheme rates over the years and may continue to do so in the future.

As per SEBI data, investors in India opened 14.2 million new Demat accounts in FY21, which is nearly three times the figure of 4.9 million accounts in FY20. Meanwhile, the stock markets have also performed well over the past year despite the economic slowdown due to the pandemic.

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