While the quantum of bank deposits remains much larger than mutual funds, the latter is quickly emerging as the preferred instrument for financial savings. According to Bank of Baroda economist Dipanwita Mazumdar, changing financial landscape, volatility in the interest rate regime and increasing risk-taking appetite have led to a change in the pattern of deployment of financial savings.
“Bank deposits would face competition from mutual funds as households get more market savvy and are willing to take their chances in the capital market. Mutual funds provide a safer way by pooling resources and investing the same based on professional judgment,” says Mazumdar.
“Within various mutual funds schemes, debt funds have still not caught on relative to equity and hybrid ones. A rather underdeveloped secondary market and a more complex market to understand could be the reasons behind this phenomenon,” she adds.
In a report, Mazumdar has pointed out some interesting trends since FY2016.
Since FY16 (till Sep-22), total bank deposits have shown an accretion of Rs 77 lakh crore. Within that, term deposits have increased by Rs 66 lakh crore. “A secure interest rate regime and risk-averse sentiment have worked in favour of garnering bank deposits at a faster pace,” says Mazumdar.
Net AUM of Mutual funds rose by Rs 26.1 lakh crore, in the same period, which is just about 1/3rd of the pace of accretion in bank deposits. Most of the mobilization was in equity funds, which increased by Rs 10.8 lakh crore. Debt funds rose at a much slower pace of Rs 4.8 lakh crore. The balance was from ‘others’ component which comprises hybrid schemes among others.
The larger part of substitution that has taken place between bank deposits and Mutual Funds has been mainly with equity funds.
Bank deposits have grown at a double-digit rate in 3 out of 6 years. In these years (except Mar-21), interest rates on term deposits (Weighted Average Domestic Term Deposit Rate-WADTR) remained favourable in the range of 6.89-6.97%.
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%,” says Mazumdar.
In case of debt Mutual Funds, growth was in double digits for only 2 years where even bank deposits grew at a similar rate. In FY21 as consumption was restricted, savings increased in all three avenues i.e. deposits, debt funds and equity funds.
Mutual Fund AUM has been higher than that of deposits in all years 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.
“It can also be seen that interest rate movements can also be related to the preferences of savers. In FY17 for instance the WADTDR had come down from 7.73% to 6.97%. Growth in deposits, though in double digits slowed down while there was acceleration in growth in debt funds as well as overall AUM,” says Mazumdar.
(Views expressed above are those of the respective commentator. Mutual fund returns are subject to market risks. Please consult your financial advisor before investing)