Growth of MF debt schemes lags behind bank deposits

Mutual Funds’ debt assets under management (AUM) as a percentage of bank deposits have fallen in the last five years in the backdrop of banks attracting huge investments due to a rise in interest rates. 

On the other hand, investors’ confidence in debt mutual funds was shaken by credit incidents and increases in key bank rates during the said period.

Debt AUM of mutual funds at ₹13.58 lakh crore accounted for 7 per cent of bank deposits, which stood at ₹200.84 lakh crore as of November-end.

However, debt AUM at ₹12.94 lakh crore accounted for 11 per cent of bank deposits, which stood at ₹121.26 lakh crore in November 2018.

• Also read: MF debt schemes to park ₹3,300 crore in CDMDF next week

Referring to debt fund AUM as a percentage of bank deposits coming down, Navneet Munot, MD and CEO, HDFC Asset Management, said taxation should be made favourable to develop the corporate bond market.

“The industry has 16 crore folios but less than 5 per cent are in fixed income and the rest are in equities. The success of “mutual fund sahi hai” on the equity side needs to be replicated on the fixed income side too,” he said at a recent summit on debt capital market organised by the TRUST Group.

Bhavik Thakkar, CEO, Abans Investment Managers, observed that debt MF investments are largely driven by institutional investors as part of their treasury operations and retail participation is very low compared to bank deposits.

Moreover, he said that awareness of debt market functioning is very low among retail investors compared to the equity market.

• Also read: Debt MFs continue to attract retail flows despite volatility

Equity shines bright

Thanks to the bullish equity markets in the last couple of years, overall mutual fund assets reached ₹49.05 lakh crore in November 2023, accounting for 24 per cent of the ₹200.84 lakh crore in bank deposits..

In November 2018, overall AUM of ₹24.03 lakh crore accounted for 19 per cent of the ₹121.26 lakh crore in bank deposits..

Sriram BKR, Senior Investment Strategist, Geojit Financial Services, said incremental flows into mutual funds have been inching closer to bank deposits, aided by huge inflows into equity and equity-oriented hybrid assets for the 12-18 months and the assets also swelled on the backdrop of a sharp rally in the equity market.

However, the growth of debt assets slowed due to credit risk events in 2018 and the rise in interest rates since 2021-22.

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It remains to be seen if MF’s fixed income schemes can attract FD investments without the indexation benefit, Sriram said.

Amit Goel, Chief Global Strategist, Pace 360, said mutual funds are growing at a much faster clip than bank deposits, largely supported by equity funds, which are attracting investment from many asset classes including direct equity, physical assets such as real estate, and partly from bank deposits.

“We do not see equity MF inflows as a big threat to bank deposits. With higher interest rates, bank deposits gained more market share and this trend will continue for the next few quarters,” he added.