Why are Small Investors Ditching Fixed Deposit for Mutual Funds?

Small investors Ditching Fixed Deposit for Mutual funds?

Due to the declining interest rates, investors are preferring mutual funds over the fixed deposits. During a recent SBI research report, there was an increase of 142 lakh investors in FY21 since last year, with 122.5 lakh new accounts at CDSL and 19.7 lakh accounts in NSDL. Why are Small Investors Ditching Fixed Deposit for Mutual Funds?

To boost the growth and help in the economic development, the RBI asked the banks to maintain low-interest rates to help those affected by covid-19 and lockdown. But the banks decreased the interest rates of the fixed deposits, which saw many investors move to mutual funds even though there was a higher risk.

The smaller investors have chosen to invest in mutual funds as in the long run these will yield more return than FDs as their interest rates are at an all-time low.

The bank deposits crossed Rs. 150 trillion in March 2021, as reported by the media. But the banks could only add about Rs. 32,482 crore from 23 April 2021 to 20 May 2021. To put this into perspective, during the same period over 1.2 trillion was deposited last year. 

Compared to that, the mutual funds faced an all-time high inflow of deposits of about Rs. 10,000 crores in May 2021, as reported by AMFI. At May-end the deposits touched the Rs. 33 crore mark under Assets under Management (AUM).

With the FD interest rates going as low as 3%, people who didn’t want to take the risk of investing in the mutual funds earlier are now investing in it as they do not see any profit in investing in FDs, said the Co-founder and COO of Groww Harsh Jain.

According to him, there was a continuous growth in salaried individuals who invested in mutual funds especially in SIP.

Mutual Funds have several options for investors to choose from like debt, equity, and hybrid schemes. Investors can choose their funds based on their requirements and see what the risk would be like. The Government has, over the years, decreased the small saving schemes over the years and might continue to do so.

According to the SEBI data, investors have opened about 14.2 million Demat accounts compared to the 4.9 Million last year. The Growth in stocks was also seen even though there was an economic slowdown due to the pandemic.

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