With bank deposit rates plunging sharply in the last few years, Indian investors are ditching bank deposits in favour of mutual funds, according to Care Ratings. With burgeoning inflows, the mutual funds industry corpus has topped even the Rs 20 lakh crore mark. According to the report, in FY18, it has been observed that there was conscious migration from bank deposits to mutual funds as deposit rates had come down sharply making them less remunerative. “In incremental terms mutual funds were able to garner a proportionately higher share of household savings,” observed the report.
Care observed that the AUM of the industry is now around 18% of outstanding deposits in the system and the fact that it is growing rapidly is indicative of the discerning investor. Noting some of the reasons for this shift, Care said observed that households accessing these funds is significant, as it competes directly with bank deposits, which were the most preferred vehicle for parking savings previously. “The relatively higher returns on bonds with certain accompanying tax benefits if held for a period of over 3 years makes them more attractive than bank deposits,” observed the report.
Care observed that while the AUM of mutual fund industry has nearly doubled in the last three years, the bank deposits have moved by around 34%. The growth in mutual fund inflows has also propped up both the equity and debt markets. In fact, of late mutual funds activity in the equity market has been more significant in driving sentiment than that of FPIs, said the report.
The report also observed the increasing importance of mutual funds activity in the equity market which has been more significant in driving sentiment than that of FPIs.
The report has some key points to make-mutual funds have matured to a very large extent to effectively offer competition to bank deposits. The introduction of LTCG tax in April-18 on equity based income would have a bearing on the flow of investments which needs to be monitored closely in FY19.