Banks face stiff competition from mutual funds in mobilising capital

However, mutual fund AUM rose by Rs 4.97 lakh crore to Rs 44.39 lakh crore during the June quarter. Income funds assets rose by 14 per cent, or Rs 1.65 lakh crore, to Rs 13.47 lakh crore and growth funds AUM jumped by 14.9 per cent to Rs 17.43 lakh crore, according to data compiled by Bank of Baroda. The benchmark Senses rose by over 5,700 points during the June quarter, boosting the inflows into mutual fund schemes and returns on various schemes.

“It does appear that bank deposits would continue to face competition from this segment in the months to come. Time deposits of banks have grown at a lower rate of 5.3 per cent indicating that the Rs 2,000 notes deposited could have gone into the non-term deposits accounts,” said Madan Sabnavis, Chief Economist, Bank of Baroda. The good performance of the stock market has been one of the drivers of the increased interest in mutual funds. This may account for the slight increase in share of equity funds in AUM, which significantly was not at the cost of income funds (debt).

This financial year started off quite significantly for the banking system in terms of business. To begin with, the government had removed the long-term capital gains tax benefits for debt mutual funds, which gave a sense that savers would migrate to bank deposits. The proxy demonetisation of the Rs 2,000 note gave a fillip to banks as people deposited most of the notes in their accounts. This was a collateral benefit for banks as around Rs 2.36 lakh crore came in by June 30, on this count, Sabnavis said. Meanwhile, stock markets did very well with the Sensex scaling new heights which was supported a lot by the foreign portfolio investor (FPI) money coming in. Accordingly, the ratio of AUM-MF to deposits improved from 21.8 per cent to 23.2 per cent. On an incremental basis (June over March), this ratio was as high as 45 per cent, BoB said.

Contrary to expectations, income schemes have done well with 14 per cent growth that is comparable to that of equity. Hybrid and the ‘others’ category also grew at a faster pace than bank deposits.

The indexation benefits on long-term capital gains (LTCG) on debt mutual funds was scrapped from April 1, 2023. Debt mutual funds from April 1 will be taxed at income tax rates as per an individual’s income. Without indexation benefits, debt MF investments would now be at par with banking and other fixed-income products. The changes in taxation were proposed by the government in the Finance Bill 2023.