Bank deposits and mutual funds: cogs of the same wheel
Source: Live Mint
There is a view that in the growing pie of savings and investments, banks are losing out to mutual funds. That may be happening in the margins as India’s equity market has been on a bull run. But let us look at the big picture.
While individuals are moving towards financialization of their savings and investments, even today, there is a preponderance of physical investments. We have to move our gaze from metro and tier II cities to the interior, remote locations. When we move to ‘Bharat’ from ‘India’, we find that the priorities are different.
As per one estimate, in household savings across the country, little more than half goes to property, about 15% to physical gold, and about 13% into bank deposits. The balance is divided among insurance funds, provident and pension funds, equity, and cash. The equity investment culture is yet to catch on in a meaningful way, accounting for less than 6% of household savings.
In today’s age of internet and digital means, awareness is increasing. Execution is easier than earlier. That bodes well for the future of equity and other market-related instruments. India is the fastest-growing major economy in the world, and market-linked investments, including mutual funds, offer an avenue for higher growth investments.
Bank deposits, though, have the inherent advantage of familiarity with savers, strong brands, and the visualization of returns, which is a commitment given in writing. Both bank deposits and mutual fund assets under management (AUM) are growing at a sanguine pace.
The quantum of bank deposits increased 9.6% from ₹164.6 trillion as on March 2022 to ₹180.4 trillion as on March 2023, and by another 13.5% to ₹204.7 trillion as on March 2024. As on 23 August, bank deposits had increased further to ₹213.2 trillion, growing by 4.1% since March.
Mutual fund AUMs also have been making rapid strides—from a monthly average of ₹37.7 trillion as on March 2022 to ₹40 trillion a year later, growing at 6.1%. In March this year, mutual fund AUMs had grown by 37.5% from a year earlier to ₹55 trillion. By August, MF AUMs were at ₹66 trillion, growing by 20% since March.
The growth momentum of the mutual fund industry may imply that it is eating away at bank deposits at the margin.
However, what is missing in this discussion is that bank deposits are counted at face value. In mutual funds, the net asset value (NAV) is calculated every day at market prices. When the stock market is in a bull phase, mutual fund AUMs grow at a commensurate pace.
While there is no exact data to bifurcate mutual fund AUM growth between fresh investments and mark-to-market related uptick, we can arrive at a perspective.
Equity mutual fund AUM grew from ₹15.17 trillion as on 31 March 2023 to ₹23.49 trillion as on 31 March 2024. This was a growth of ₹8.32 trillion. Net inflow was ₹1.84 trillion. That is, fresh cash was only 22% of the optical AUM growth, the rest was mark-to-market related growth. (To be sure, the ₹1.84 trillion was only the fresh equity fund inflow; there were inflows into other fund categories.)
But given that bank deposits grew by ₹24.3 trillion from March 2023 to March 2024, mutual funds did not wean away much from them.
For investors, at least investors with awareness of and access to market instruments such as stocks and bonds, or investment vehicles like mutual funds, portfolio management services, and alternative investment funds, these are avenues for participation in India’s growth.
For people in remote corners of the country or senior citizens who need the assurance of a committed return, bank deposits are still available.
Joydeep Sen is a corporate trainer (financial markets) and author.
