Uday Kotak, founder and non-executive director of Kotak Mahindra Bank, has called for a need to be alert on “excessive exuberance” as mutual fund assets rise to nearly a third of bank deposits amid an increasing trend among savers to turn towards capital markets for higher returns.
“India’s saver turns investor. Post Covid, mutual fund AUM (assets under management) share, mainly equity, has doubled to 31 per cent of bank deposits. (This) Reflects structural change in financial intermediation. It grows
domestic risk capital and creates an equity culture. But let’s be alert about excessive exuberance,” Kotak said in a post on X.
In absolute numbers, the mutual fund industry’s net AUM was ₹65.74 lakh crore as of March 31, 2025, while the bank aggregate deposit base comprising demand deposits and time deposits was ₹225 lakh crore. Mutual fund investors have been consistently investing in the equity mutual funds with the inflows remaining positive — fresh investments outpacing redemption — for 51 consecutive months in May, despite the market volatility slowing down the pace of inflows.
Notably, a large part of the inflows into the capital market through the mutual fund route is happening from the B30 locations (towns beyond the top 30 cities in terms of AUM). Data from Amfi shows that 18 per cent of the
assets of the mutual fund industry came from B30 locations in May 2025, with AUM increasing from ₹10.49 lakh crore in May 2024 to ₹13.28 lakh crore in May 2025, up 27 per cent.
National accounts data, provided by the ministry of statistics and programme implementation, also shows a shifting investment pattern in household financial assets. While the share of bank deposits have fallen from 47.6 per cent in March 2021 to 45.2 per cent in March 2023, that of mutual funds have increased from 7.6 per cent in March 2021 to 8.4 per cent in March 2022.
Better returns
Higher returns in mutual funds compared with bank fixed deposits is a major reason why investors are increasingly looking to allocate a larger portion of their assets in mutual funds. For example, SBI Equity Hybrid Fund, which invests both in equity and debt, has given a 1 year return of 11.62 per cent, while a one-year fixed deposit from SBI offers an interest rate of 6.25 per cent.
The rising investor awareness through campaigns such as ‘Mutual Fund Sahi Hai’ from industry body Amfi has also garnered interest, particularly in the B30 locations.
“Mutual funds today offer better returns than that of bank fixed deposits, even though the latter is more secure. While higher return is a big draw, especially for young investors, investments also have become relatively easier because of technology and various awareness initiatives by the industry players. The mutual fund industry has also become more regulated and has more guardrails. With interest rates on a downward trajectory this trend is expected to continue in the coming years,” said Atanu Sen, former MD and CEO of SBI Life Insurance and former non-executive chairman of the NPS Trust.
The RBI has lowered the benchmark repo rate by 1 per cent to 5.5 per cent in 2025, which is expected to put pressure on interest rates on deposits. The regulator has also proposed an incentive in the form of a 1 per cent reduction in cash reserve ratio to encourage transmission of rate cuts.
Several banks have revised their deposit rates but there is a concern about keeping fixed deposits as a preferred investment option among savers.
“Drawing CASA (current and savings account) and term deposits will no doubt be challenging in the coming months, especially in a highly competitive market,” said a senior executive of a private bank.
Bankers also said that this shift is more structural and is unlikely to see any reversal. “Several banks today already have their asset management business or have tie-ups with asset management companies. For economic growth both bank deposits and mutual fund investments have a role to play,” the executive said.
Expensive valuations
Even as the market linked aspirations among investors are on the rise, domestic valuations are on the higher side, especially compared with the Asian peers, and this could be a reason why Kotak has called for caution. Data shows that the price earnings ratio of BSE 500 index has been on an upward trajectory, rising from 22.4 in May 2022 to 25.1 in May 2025 (see chart).
However, analysts said that at a time when inflation is undershooting and growth is outpacing expectations, valuation are likely to remain elevated.
“Elevated stock valuations have prompted investors to already take a cautious stance, resulting in noticeable slowdown in equity inflows in May. But investor confidence through systematic investment plans have remained resilient. The SIP stoppage ratio has improved after several months,” said Viraj Gandhi, CEO, Samco Mutual Fund.
Analysts added that the moderation in monthly flows into equity funds appears more cyclical than structural, and with macroeconomic indicators supportive, flows into equity funds could regain momentum in the coming months.