Explained: Many small investors in the country are leaving the fixed deposit schemes and putting money in mutual funds. Investing in mutual funds is on the rise at a time when interest rates on FDs and other preferred savings schemes have hit historic lows. 

Those who are giving up on FDs and similar bank deposit schemes, expect higher earnings from riskier mutual funds, which give them higher returns. 

Higher returns are available in mutual funds 

Risk free Fixed Deposit (FD) and other small savings schemes are preferred by most of the people in India. But, the low interest on it is now slowly making it unattractive.

People are now keen to increase their exposure in riskier assets like debt and equity mutual funds for higher return on investment. The month of May has seen a gradual change, as bank deposits have declined and mutual fund inflows have increased.

There has been a steady decline in bank deposits since March after crossing the Rs 150 trillion mark. According to the report of Livemint.com, this amount has come down to Rs 32,482 crore this year as compared to Rs 1.2 lakh crore deposited in the bank between April 23 and May 21.

In comparison, mutual fund inflows have grown exponentially, witnessing a record net inflow of Rs 9,235.48 crore in May. This is the highest recorded inflow in 1.2 years. The increase in mutual fund inflows can be attributed to the healthy returns that some smaller schemes are giving despite the covid-induced economic slowdown.

Why are the interest rates low on deposits in banks?

The Reserve Bank of India (RBI) has kept interest rates at a historic low for six consecutive policy reviews. Investors are getting less interest on bank deposits, which is why many people are turning away from traditional bank deposit schemes.

The interest rates applicable on fixed deposit schemes have been declining continuously since last year. The interest rates offered by most of the banks for fixed deposits including State Bank of India are lower as compared to the previous year.

One of the reasons why small investors are investing in mutual funds is the healthy rate of return from last year and higher spending during the pandemic, which has fueled the need to save more even at the cost of higher investment risk.

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

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