Are Mutual Funds (MFs) competing against bank deposits?

Bank deposits are likely to face competition from Indian mutual funds as households are willing to take more risk, according to a report by Bank of Baroda (BoB).

“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. Bank deposits have the advantage of being safe and offer conservative but assured returns,” BoB said in a report titled -'How serious a threat are mutual funds to bank deposits?'

In the period of the pandemic when interest rates were lowered significantly by the RBI which caused deposit rates to come down, investors – both retail and corporates, put more funds in the mutual funds' schemes. 

The report found that for August 2023, y-o-y growth for bank deposits was 12.3% (excluding HDFC merger) while that for mutual funds was 18.6%.

Quoting RBI, and AMFI data, the report said that the share of mutual funds is now close to 20% against 13% 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.

Quoting RBI’s data, the report said taking 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 growth in AUM of mutual funds in the next three years. There was a CAGR of 24.8% from ₹20.26 lakh crore to ₹39.42 lakh crore in this period. In the case of bank deposits growth was just 10% from ₹135.67 crore in FY20 to ₹180.44 lakh crore in FY23.

The Association of Mutual Funds in India (Amfi) said that investors poured in a record ₹15,813 crore in August 2023 through the systematic investment plans (SIPs) route offered by mutual fund players. The MF industry's overall AUM grew to ₹46.93 lakh crore in August, as against ₹46.37 lakh crore in July.