Are mutual funds being preferred to bank deposits?

Bank deposits are likely to face competition from Indian mutual funds as households get more market savvy and are willing to take their chances in the capital market, according to a report by Bank of Baroda.

Quoting RBI’s data, the report said that financial assets of Indian households show that there has been a shift in pattern, where mutual funds and equity witnessed sharp increase in FY22 with shares of 6.3% and 1.9% in overall financial assets, respectively (ratio was 2.6% and 1.1% in FY20), while share of bank deposits declined to 25.5% in FY22 from 34.4% in FY20.

To be sure, the quantum of bank deposits is much larger, about 4.1 times than that of mutual funds denoted by AUM (assets under management).

In the report, Bank of Baroda examined whether there has been any substitution between bank deposits, mutual funds- debt and equity in the past 6 years.

The report found that since the financial year 2016 (till Sep-22), total bank deposits have shown an accretion of 77 lakh crore. Within that, term deposits have increased by 66 lakh crore.

“A secure interest rate regime and risk averse sentiment have worked in favour of garnering bank deposits at a faster pace,“ the report said.

On the other hand, net AUM of mutual funds rose by 26.1 lakh crore, in the same period, which is just about one-third of the pace of accretion in bank deposits.

Most of the mobilization was in equity funds, which increased by 10.8 lakh crore. Debt funds rose at a much slower pace of 4.8 lakh crore. The balance was from ‘others’ component which comprises hybrid schemes among others.

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As per the report, the table shows that, bank deposits have grown at a double-digit rate in three out of the six years. In these years (except March 2021), interest rates on term deposits (weighted average domestic term deposit rate-WADTR) remained favorable in the range of 6.89-6.97%.

Further, equity mutual funds have also shown steady growth and the movements corroborate with those in Sensex.

For example, in FY20 when Sensex fell sharply by 23.8%, AUM-MF (equity) also declined by 32.4%. In FY21, as Sensex rose by 68%, AUM-MF (equity) also picked up by 66%.

In FY23 however, while the Sensex has moved up marginally equity funds have witnessed high growth of 13.8% as risk appetite has increased in a regime of low interest rates. Interestingly, the WADTDR has increased during this period though low at 5.29%.

In case of debt mutual funds, growth was in double digits for only two years where even bank deposits grew at a similar rate. In FY21 as consumption was restricted, savings increased in all the three avenues i.e. deposits, debt funds and equity funds.

The data showed that growth in AUM has been higher than that of deposits in all the year barring FY20 which was affected by the month-end panic caused by the announcement of the lockdown. This was due to both a lower base as well as increasing interest of households in mutual funds.

As per the report, mutual funds provide a safer way by pooling resources and investing the same based on professional judgment. However, within various mutual funds schemes, debt funds have still not caught on relative to equity and hybrid ones.

A rather under developed secondary market and a more complex market to understand could be the reasons behind this phenomenon, said the report.

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