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FD or Mutual Funds: Where would you invest? If you understand equities, you’re likely to go for Mutual Funds, but if you’re looking for safe, secure investment, you’d choose fixed deposits. This is also why all talk of good returns on mutual funds fall flat in front of good old FDs.

The total AUM of Indian mutual funds is growing rapidly. Despite this, banks have about 5x of this amount deposited with them. Another surprising thing is that irrespective of solid growth in mutual funds, the AUM of debt funds is consistently falling.

Bank FDs remain dominant
According to a report, the amount deposited in banks grew to Rs 191.16 lakh crore during Q2 ending June 2023. Out of these, Fixed deposits made up for Rs 167.11 lakh crore, growing by 5.3%.  If we talk about mutual funds, they’ve registered a 25% year-on-year growth in their AUM. During Q2 ending June 2023, the AUM of mutual funds grew to Rs 44.39 lakh crore.

While banks saw a Rs 11.2 lakh crore rise in their deposits, the AUM of mutual funds inched up only by Rs 5 lakh crore. That’s not to say that mutual funds are growing slowly. However, they lag far behind FDs in terms of deposited amount.

Often, bank FDs are compared with debt mutual funds. But over the last three years, people have begun preferring FDs over debt funds.  Since debt mutual funds generally invest in bonds and government securities, their returns are comparable to FDs in the long run.

During the pandemic, investors began exiting debt mutual funds in droves. During 2021, debt funds saw outflows worth Rs 34,545 crores, which rose to Rs 2.3 lakh crore in 2023. As of 31st March, 2023, the total AUM of debt funds had been reduced by a further 9% to Rs 11 lakh crore.

One of the reasons for such massive outflows was the taxation changes made by the government. Starting 1st April 2023, the indexation benefit on long-term capital gains, which was a prominent feature of debt mutual funds, was done away with. Indexation means adjusting the returns against inflation before taxing these returns. Thus, in order to make the most of the old rule, people began pouring in funds into debt schemes till 31st March.

The last week of March alone saw investments worth Rs 31,000 crore in debt schemes. But this has not helped the net AUM of debt funds, which has been continually falling over the last 3-4 months.

Investments in debt schemes fell strikingly in April, since they were no longer beneficial from a tax perspective. Given that the indexation benefit was no longer applicable, they were now to be taxed akin to FDs.

Now the question is, why do FDs remain investor favourites? That’s because rising interest rates on bank deposits and lucrative returns in equities have made people wary of debt schemes. Also, FDs are a simple way to invest,  which can be easily understood by everyone. That is not the case with several schemes of mutual funds<Alpha in>, which are often complicated.

Says CFP Jitendra Solanki, “High interest rates on bank deposits and erosion of tax benefits for debt funds are the main reason why debt schemes are not faring well. People are able to understand bank FDs far more easily. Moreover, returns are guaranteed in FDs, which is not the case with mutual funds.”

Another reason why AUM of debt mutual funds is falling is due to the reducing corporate investments in it. As of December 2022, corporate investments in the total mutual fund AUM fell below 40% for the first time in 12 years. Recent reports have also noted that debt funds with AUM worth Rs 1.08 lakh crore, which make up 10% of the total debt AUM, are in stress.