Both FDs, MFs Have Scope To Grow

In a growing economy with increasing disposable income and savings, such as ours, all investment avenues and investment vehicles receive inflows. At present, both bank fixed deposits (FDs) and mutual funds (MFs) are growing buoyantly on the back of investor inflow in India. However, there is a difference in the way the quantum and growth are measured or perceived between these two popular investment products.

Quantifying FDs And MFs

Bank FDs are measured at face value. For overall bank FDs in India to move up from say Rs 100 to Rs 110, it requires Rs 10 of incremental inflows. MFs, on the other hand, are measured at market value. For MF assets under management (AUM) to move up from say Rs 100 to Rs 110, it is possible that the industry receives Rs 5 of incremental flows. Once the market goes up, the AUMs going up by another Rs 5. In MFs, the net asset value (NAV) is calculated every day at market prices. In a bull phase, once NAV goes up, then along with growth of the price of the underlying stocks, MF AUMs also grow at a commensurate pace.

Between March 2023 and March 2024, bank deposits grew from Rs 180.40 trillion to Rs 204.7 trillion, which was a growth of 13.5 per cent. In this same period, MF AUMs surged from Rs 40 trillion to Rs 55 trillion, a growth of 37.5 per cent. This gave rise to a perception that MFs are eating away from bank deposits.

As on September 2024, bank deposits were at Rs 215 trillion. Hence, the growth rate of FDs from March-September 2024 was 5.2 per cent. Over the same period, MF AUM surged to Rs 68 trillion, a growth rate of 23.6 per cent. However, October 2024 onwards, the equity market corrected. As on February 2025, MF AUM is Rs 67.5 trillion. This is a slight degrowth over March 2024. Bank FDs, as on February 2025, is Rs 223 trillion. It has grown by 3.7 per cent. This is a modest growth rate, but still higher than the marginal degrowth of MF AUM.

These data points highlight the differences in the quantification of bank FDs and MFs. Earlier, when MF AUM was growing at a faster clip than bank deposits, only a fraction of it was incremental inflows; the bulk of it was mark-to-market gains, where the AUM was moving up along with the market. There is, however, no exact data to show the incremental flow and exact quantity of mark-to-market impact. According to estimates, only one-fourth to one-third is fresh cash flow.

For a perspective, equity MF AUM grew from Rs 15.17 trillion as on March 31, 2023 to Rs 23.5 trillion as on March 31, 2024, a growth of Rs 8.32 trillion. Net inflow was Rs 1.84 trillion. In other words, fresh cash was only 22 per cent of the optical AUM growth, and the rest was mark-to-market.

The Macro Perspective

As a growing economy, our corporate sector requires resources, which are raised through both equity and debt.

Corporates raise equity through primary issuances. MFs are one of the major investors in primary equity issuances. The secondary market is relevant as well, and the MF industry also plays a huge role here. For instance, the systematic investment plan (SIP) book, which stood at Rs 26,000 crore per month or Rs 12.4 trillion cumulative as on February 2025, has been providing a counter to persistent foreign portfolio investor (FPI) selling since October 2024.

Debt capital is raised through two means: loans from banks, and through the issue of bonds or debentures. For loan funding for corporates, small businesses and individuals, banks are the major provider, supported to an extent by non-banking financial companies (NBFCs). Net to net, in the growth of our economy, both FDs and MFs play a pivotal role.

The Investor Perspective

Bank deposits are one of the most basic investments. FDs have the advantage of familiarity with savers, strong brands (applicable to leading banks), and visualisation of returns, which is the commitment given in writing. Returns are linear and are not subject to any market movement or profitability of the bank, hence savers find it easy to understand. According to RBI data, as on March 2024, Rs 141 trillion of household savings were in bank deposits. Household exposure to MFs, as on March 2024, was Rs 33.8 trillion. A point to be noted here is that this exposure to MFs is lower than the exposure to life insurance funds, which stands at Rs 67.6 trillion. MFs provide the avenue to investors at large to participate in the growth story of India.

Investing directly in equities or bonds is not everyone’s cup of tea. Therein lies the importance of MFs, which provide the avenue to the masses to participate in the market through a professionally managed vehicle in exchange for a fee. There are multiple fund options in MFs one can choose from, such as equity, debt and hybrid, which is a combination of equity and debt.

With so many fund options to choose from, there is always one or more that can suit the need or requirement of every investor. Over a long period of time, equity has provided returns higher than bank deposits, but they are subject to ups and downs in the interim period.

The comparison between debt MFs and bank FDs is closer. Debt funds are subject to mark-to-market, which can work in your favour when interest rates are down, or adversely, when interest rates are moving up. If you want the assurance of contractual returns, such as a commitment of 7.5 per cent per year, you can choose bank FDs. If you want to accumulate wealth aligning with the growth of India’s economy, you can also have a judicious portfolio mix of MF products.

Conclusion

It is not possible to make an exact comparison between bank deposits and market-linked investments.

In MFs, investors accumulate wealth over a long horizon, as well as use them for short-term parking, through appropriate fund choices. Long-term MF products are subject to market fluctuations. Bank deposits are for short-term parking as well as for those investors who are either not aware of market-linked products or want visibility of returns.

From the macro perspective, MFs are not really weaning away from bank deposits. There is enough scope for both to grow.

We have the highest working age population in the world and are also the fastest-growing major economy in the world. Our per capita gross domestic product (GDP) is low, $2,700 per year, but the projected growth rate is the fastest in the world. With the growing pool of earnings and increasing financialisation of savings, investments would be enough to fund the resources required by the corporate sector.

By Joydeep Sen, Corporate Trainer and Author