Mutual funds versus bank deposits? Dispel that myth.

livemint.com:

₹52.7 trillion worth of assets under management (AUM) as of end January, and 150 million investor folios. On an average, over 1.2 million new folios have been added every month since April 2017. It is expected that the MF industry’s AUM will cross ₹100 trillion in the next nine or 10 years.

This, however, does not necessarily mean a decline in bank-deposit growth, as some financial analysts have argued. Firstly, if we look at the MF industry’s net inflows/outflows, we see net inflows of ₹22 trillion from 2013-14 till end-January of 2023-24, the equivalent of about 41% of the incremental current-and-savings-account (CASA) deposits that banks got in the same period. The AUM of MFs increased by ₹45.7 trillion from 2013-14 to 2023-24 (combined effect of inflows and increased asset values), while deposits of the banking system increased by around ₹137 trillion (likewise).

So, the AUM of MFs expanded by around a third of bank deposit value. This indicates that flows into MFs came from deposits in the banking system; otherwise, deposit growth would have slumped and banks could have faced asset-liability mismatches. How do we explain this link?: When a customer buys MFs, the money mostly flows from the person’s savings account to the current accounts of MF distributors (and vice versa).

Thus, it is debited from the customer’s account but stays in the banking system. Even upon the redemption of MF units, the money flows into the customer’s account from the company’s accounts. Thus, deposits shift from savings into current accounts when a retail investor invests, and the other way round when the investor redeems the investment.

Thus, a decline in bank deposits is MF-agnostic. This is borne out by other data. If we look at