Investors’ new love for mutual funds might take sheen off bank deposits
- The growth in AUM for August 2023 compared to the same period in 2022 was 18.6% across all schemes.
- The growth in
bank depositswas 12.3% during the same period, as per RBI data.
- There's also a shift among mutual fund schemes with debt schemes losing some momentum.
On the other hand, bank deposits offer safety and ensure conservative yet guaranteed returns. During the pandemic, when the Reserve Bank of India (RBI) significantly reduced interest rates, causing deposit rates to decline, both retail and corporate investors poured more funds into mutual fund schemes. This resulted in an increase in the
Mutual fund deposits grow faster than bank deposits
Using 2019-20 as the base year, a significant transformation occurred in the financial landscape as interest rates reached historic lows. Subsequently, there was a notable surge in the growth of assets under management (AUM) for mutual funds over the following three years.
During this period, the compound annual growth rate (CAGR) was 24.8%, increased from ₹20.26 lakh crore to ₹39.42 lakh crore according to data by Association of Mutual Funds in India(AMFI). In contrast, the growth in bank deposits during this period was more modest, at just 10%, a per RBI data.
Shift in investor preference towards mutual funds
The growth in mutual funds AUM for August 2023 compared to August 2022 was 18.6% across all schemes. The growth in bank deposits was 12.3%. While equity/growth schemes saw a 25.8% growth , while hybrid and debt mutual funds grew at 14.5% and 7.4% respectively.
The proportion of mutual funds in the market now stands at approximately 20%, a significant increase from the pre-pandemic figure of 13%. It is evident that there has been a notable shift in investor preferences towards mutual funds, primarily driven by the attractive returns they offer.
For context, the Sensex, which was nearly at 30,000 in March 2020, surged to 58,992 in March 2023, achieving a CAGR of nearly 26% per annum. As of August, the Sensex had reached 64,831.
Risk appetite of investors increase, debt schemes lose momentum
AdvertisementThe highest growth rates in mutual fund schemes have been in equity and 'others' categories, indicating investors' increased risk appetite. They are favouring growth-oriented schemes, indices, and ETFs in anticipation of higher returns, especially during a period of high inflation (18.3% over the past three years). On the other hand, AUM growth in debt schemes has been the slowest.
There's also a shift among mutual fund schemes, with debt schemes losing some momentum. According to the report, this can be partly attributed to banks raising deposit rates, reducing the yield gap. “The new provisions of the previous budget have taken away the tax arbitrage of debt funds. The two products of the fixed income segment bank deposit and
Over time, there has been a noticeable shift in the allocation of funds towards bank deposits and mutual funds. The pandemic marked a turning point, as investors, compelled by circumstances, embraced more risk through mutual funds.
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