Explained: Why small investors are ditching FDs for mutual funds

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Many small investors in the country are ditching safer fixed deposit (FD) schemes and pouring money into mutual funds instead. The gradual move towards mutual funds comes at a time when interest rates offered on FDs and other preferred savings schemes have dipped to historic lows.

People who are ditching FDs and similar bank deposit schemes hope to earn more from riskier mutual funds which offer higher returns.

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HIGHER MF RETURNS

While risk-free FDs and other small savings schemes are preferred by a majority of India’s population, it seems that the low returns have made them unattractive.

People are now willing to increase their exposure to riskier assets like debt and equity mutual funds for higher returns on investments. A gradual shift has been observed from May as bank deposits declined and mutual fund inflows rose.

Bank deposits are steadily declining since March after crossing the Rs 150 trillion mark. Compared to Rs 1.2 trillion worth of bank deposits between April 23 and May 21, this year’s amount has reduced to Rs 32,482 crore, reported livemint.com.

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In comparison, mutual fund inflows have sharply increased, witnessing a record net inflow of Rs 9,235.48 crore in May. It is the highest recorded inflow in 1.2 years. The rise in mutual fund inflows can be credited to the healthy returns that some smaller schemes are offering despite the Covid-induced economic slowdown.

WHY ARE INTEREST RATES ON DEPOSITS LOW?

It may be noted that the Reserve Bank of India’s (RBI) has kept interest rates at historic lows for six consecutive policy reviews. For months, individuals have been earning low interests on bank deposits, prompting many to move away from traditional bank deposit schemes.

There has been a steady decline in interest rates applicable to fixed deposits schemes since last year. The interest rates offered by most banks of fixed deposits including State Bank of India (SBI) are lower compared to last year.

One reason why small investors are pumping money into mutual funds is the healthy rate of return since last year and higher spending during the pandemic, which has fuelled the need for more savings, even at the cost of greater investment risk.

Another reason why small savers are looking at mutual funds is due to uncertainty over small savings interest rates. A few months ago, the government had reduced interest rates on small savings schemes but rolled back the decision within 24 hours.

However, senior bankers suggest that bank deposit interest rates may not fall further.

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