Indians are getting more financially savvy

A few weeks ago, I was taking a cab home from work, when my driver asked me if I invested in mutual funds. I replied in the affirmative and asked him if he was too. He said he was thinking about it because a few other drivers had proposed to him that they all pool in their funds together and invest in one. “They say it’s a safe way to make a good profit,” he said.

If recent data from the Reserve Bank of India is anything to go by, it seems that Indians are becoming more financially astute and diversifying their savings options. The growth in bank deposits has reportedly fallen to its lowest level since 1963, totalling 6.7% in the fiscal ending March 2018, as more Indians plowed their savings into mutual funds and other instruments as opposed to fixed deposits in banks.

This marks a reversal in the deposit surge following the government’s demonetisation announcement in November 2016, wherein as much as ₹4.3 trillion excess deposits entered the banking system - an anomaly by all circumstances. As a result, there was a larger base of deposits to grow from, so the rate of growth this year was destined to slow down.

Concurrently, the sharp decline in cash in circulation has also been reversed, with a report by Nomura, an investment bank, observing that cash is now back to pre-demonetisation levels, in terms of its ratio to GDP.

Mutual funds are an easy way to access both equity and debt markets, which are riskier than fixed deposits but also offer higher returns. They have grown in prominence as investment options in the last few years, as Indian households have looked for other ways to invest their savings. And that’s not just in large cities. Tier-2 and Tier-3 cities are getting in on the action too.

This will only be made easier by the uptake of mobile applications like Paytm, which is set to launch its own mutual fund distribution service, and Sqrrl, a financial services app that is available in a number of regional languages.

The total assets invested in mutual funds in India rose to ₹21.4 trillion at the end of 2017-18, a 22% jump from the previous fiscal year and more than a four-fold increase from 2008. Other savings instruments like insurance funds have also recorded strong growth.

Assets invested under mutual funds now comprise 18% of all deposits in the financial system, according to a report by CARE Ratings, a ratings agency. The report notes, “In FY18 it has been observed that there was conscious migration from bank deposits to mutual funds as deposit rates had come down”. Average deposit rates have fallen gradually from 8.6% in 2013-2014 to 6.5% in 2017-18.

In response to the growing popularity of mutual funds, the government is looking to cash in on the party. In the Union Budget for 2018, the finance minister, Arun Jaitley, announced a 10% tax on all capital gains larger than than ₹100,000 on the sale of mutual fund units that have been held for longer than a year. While the recent move could dull the enthusiasm for mutual funds slightly, they will continue to keep growing at a solid rate.