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Is the post-pandemic era raising concerns about the potential threat of mutual funds to bank deposits?

For August 2023, the annual growth for mutual funds has exceeded that of bank deposits.

While bank deposits grew 12.3 per cent (excluding the HDFC merger) annually, mutual funds witnessed an 18.6 per cent increase in the same period, according to a report by the Bank of Baroda.

Data from the Association of Mutual Funds in India (Amfi) shows investors poured in a record Rs 15,813 crore in August 2023 through the systematic investment plans (SIPs) route offered by mutual fund players.

Even in fiscal 2023, household investments in mutual funds (MFs) reached a record Rs 1.8 trillion, largely driven by SIPs.

During the pandemic, when interest rates were low, investors – both retail and corporates, put more funds in the mutual funds’ schemes. Quoting RBI and AMFI data, the Bank of Baroda report said that the share of mutual funds is now close to 20 per cent against 13 per cent before the pandemic set in.

“Clearly, there has been a shift in the investor preference to mutual funds and the returns can be considered to be the foremost consideration,” the report mentioned.

Data from market regulator Sebi indicates that most household funds were channelled into equity schemes in 2022-2023.

The Sensex had moved from almost 30,000 in March 2020 to 58,992 in March 2023 with a CAGR of almost 26% per annum. As of August, the Sensex was at 64,831. Debt instruments, especially in corporate bonds, give a higher return than bank deposits and also carry an advantage on taxation on long-term capital gains.

How has the share of mutual funds in the sum of AUM of mutual funds and deposits with banks moved?

Bank of India took 2019-20 as the base year after which there was a sea change in the financial landscape with rates being kept at an all-time low, there was a sharp increase in the growth in AUM of mutual funds in the next three years. There was a CAGR of 24.8% from Rs 20.26 lakh crore to Rs 39.42 lakh crore in this period. In case of bank deposits, growth was just 10% from Rs 135.67 crore in FY20 to Rs 180.44 lakh crore in FY23.

The share of mutual funds in the combined outstanding amount increased as seen in the chart below:

What is the picture in FY24 so far?

The chart below gives the growth in various categories of investments in mutual funds for August 2023 over August 2022.


During this period, the growth in bank deposits was 12.3%.

Interestingly, the highest growth rates in mutual fund schemes were in the equity and ‘others’ category.

“This is indicative of the higher risk-taking appetite of investors who have preferred to invest in growth-oriented schemes as well as indices and ETFs in anticipation of higher returns, especially at a time when inflation has been high. Cumulative inflation has been 18.3% in the three years ending 2022-23,” noted the report.

Growth in assets under management under debt was the lowest at 7.4% this year so far.

There has also been a shift within mutual funds across different schemes.


Debt or income schemes have lost a bit of momentum which may be attributed partly to the fact that banks have also started increasing deposit rates thus lowering the difference in yields.

Another factor militating against these schemes has been the government’s decision to remove the long-term indexation benefit for debt schemes which hence removes the tax advantage which was hitherto there.

The decline in the share of debt and income schemes in AUM was shared by equity schemes and the ‘others’ category.

“With time there has definitely been a change in the composition of funds channelled to deposits and mutual funds. The pandemic can be considered to be a turning point where under the force of circumstances, investors took more risk via the mutual funds route. And with the markets being supportive as the economy has only been showing signs of recovery along with the India Growth story spreading, the returns have been impressive. In this environment preference for market-oriented savings avenues has increased,” said the Economic Research Department at Bank of Baroda.

Mutual funds have an inherent advantage when it comes to investing as they offer a variety of products depending on the preferences of the investors. For those who are less conservative, there are hybrid schemes; while index funds and ETFs provide more aggressive avenues for putting funds for investment. However, all of these investments carry a certain degree of risk as they are market-oriented.

Bank deposits have the advantage of being safe and offer conservative but assured returns.

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