Summary of this article
Debt mutual funds are not replacing bank FDs, RBI found
FDs and debt funds largely grow together rather than compete for savings
Rising mutual fund investments have not significantly impacted bank deposit growth
Debt mutual funds are not emerging as a direct replacement for bank fixed deposits (FDs) in India, contrary to growing concerns amid the rapid expansion of the mutual fund industry, according to a study by the Reserve Bank of India (RBI).
The analysis, published in RBI's Annual Report 2025-26, found that FDs and debt mutual funds largely function as complementary savings avenues rather than competing products, irrespective of whether the banking system is operating under surplus or deficit liquidity conditions.
The findings come at a time when mutual funds are attracting an increasing share of household financial savings, prompting debate over whether rising investments into market-linked products could dent banks' ability to mobilise deposits.
"The analysis indicates that bank time deposits and debt mutual funds act as complementary avenues in both surplus and deficit liquidity regimes," the RBI said.
Why RBI Examined The Issue
The central bank undertook the study against the backdrop of changing savings preferences and the rapid growth of mutual fund assets over the past decade. While bank FDs remain India's dominant household savings instrument due to their safety and capital protection features, debt mutual funds offer market-linked returns through fixed-income securities, and equity mutual funds provide the potential for higher long-term gains at greater risk.
Recent evidence has suggested that mutual funds are increasingly becoming an alternative investment avenue for Indian savers. During the five-year period from 2020-21 to 2024-25, outstanding bank FDs grew at an average annual rate of 10.7 per cent. In comparison, assets under management (AUM) of debt mutual funds expanded by 5.3 per cent, while equity mutual fund AUM surged 32.4 per cent.
Against this backdrop, the RBI sought to determine whether mutual funds are substituting bank FDs or merely expanding alongside them as India's financial savings pool deepens.
How The Study Was Conducted
The RBI analysed monthly data covering the period from 2013-14 to 2024-25 and examined the relationship between growth in bank FDs and mutual fund assets. The empirical framework, based on a methodology similar to a 2025 study by US Federal Reserve economists Jay Im, Yi Li and Ashley Wang, assessed whether changes in bank deposits influence flows into debt and equity mutual funds.
The study also took into account several factors that can influence investment decisions, such as returns from deposits and mutual funds, gold prices, stock market performance, short-term interest rates, market volatility, small savings growth and overall economic activity.
The RBI examined investor behaviour under both surplus and deficit liquidity regimes to assess whether changing banking system liquidity alters the relationship between deposits and mutual fund investments.
Distinct Investor Bases Limit Competition
The study found no evidence that investors systematically move money out of bank FDs and into debt mutual funds. According to the RBI, one reason is the structural segmentation of India's financial system.
"Within India's bank-centric and evolving debt market, bank time deposits and debt mutual funds predominantly serve distinct investor segments," the central bank noted.
This differentiation reduces direct competition between the two products and allows them to grow simultaneously.
As a result, inflows into debt mutual fund and growth in bank deposits generally move in tandem, suggesting the two investment avenues complement rather than cannibalise each other, irrespective of liquidity conditions in the banking system.
The RBI also found no statistically significant relationship between FDs and equity mutual fund flows, suggesting that the rapid growth of equity fund investments has not come at the cost of bank deposits.
Growing Mutual Fund Penetration
The findings contrast with concerns that mutual funds are increasingly competing with traditional deposits for household savings.
In its August 2025 Bulletin, the RBI had observed that mutual funds are emerging as a potential competitor to bank deposits, particularly among India's aspirational middle class. The ratio of mutual fund industry assets to total bank deposits more than doubled from around 10 per cent at the end of March 2014 to 23.8 per cent by March 2024.
Even so, the central bank noted that mutual fund penetration remains relatively low compared with advanced economies, where mutual fund assets account for a much larger share of gross domestic product.
The latest study suggests that while mutual funds are capturing a growing share of household financial savings, their expansion is not necessarily undermining banks' deposit mobilisation.
What It Means For Investors
The RBI's findings suggest that the growing popularity of debt mutual funds is not hurting banks' ability to attract FDs.
For banks, this is a positive sign because it shows that money flowing into debt mutual funds is not necessarily coming out of bank deposits. Both investment options are growing alongside each other.
For asset management companies, the findings indicate that industry growth is being driven by more people investing and overall financial savings increasing, rather than investors simply shifting money away from bank FDs.
For policymakers, the study highlights that India's financial system is becoming more diverse, with different savings products catering to different investor needs.
