Mutual funds’ share in household savings jumps 6x in decade on inclusion, low rates & confidence boost

MUMBAI: The share of mutual funds in the household sector’s gross financial savings increased from 0.9% in 2011-12 to 6% in 2022-23. Assets under management have grown at a compounded annual growth rate (CAGR) of 17.1%. This has made mutual funds a stabilising force in equities and helped cushion the equity market against volatility triggered by FPI outflows according to a report by RBI. The central bank has called for enhanced investor education and protection to maintain the faith and trust of new entrants.For decades, Indian households preferred the safety of fixed deposits and gold. That is changing. A recent report, Equity Mutual Funds: Transforming India’s Savings Landscape, documents how equity mutual funds have “emerged as the preferred vehicle for household investors to invest in equity markets.” The shift, it says, is driven by rising incomes, growing financial literacy and the spread of digital technology.Their clout as shareholders has also increased sharply, with “the shareholding of MFs in companies listed on the National Stock Exchange (NSE) rising from 3.7% at end-March 2010 to 10.4% at end-March 2025.”The report identifies three main factors shaping flows into equity funds: “increasing financial inclusion (proxied by demat accounts), fixed deposit rates, and business confidence.” The expansion of demat accounts, it notes, “should lead to additional flows to equity-oriented products.” Persistently low deposit rates have had the opposite effect—pushing savers to seek higher returns elsewhere. “A persistently low fixed deposit rate for an extended period might eventually lead people to search for other asset classes that offer higher returns, thereby increasing equity MF flows.” The business confidence index, meanwhile, “is expected to impact flows, as it is an indicator of future growth.”Economic growth remains the ultimate driver. “Real GDP growth does help forecast flows” while “equity MF flows do not predict real GDP growth.” Stronger growth, in other words, “enhances investor’s financial capacity and confidence, enabling greater participation in equity markets.”Yet the success of the industry also poses risks. With millions of retail investors now involved, the report urges “more efforts toward investor education and protection to maintain the faith and trust of these new entrants.” It also calls for vigilance: “A constant monitoring of risks emanating from their operations would need greater attention.” These concerns are most acute in small and midcap funds, where “MFs could be subject to large liquidity risks from redemption pressures in case of sharp downward adjustments.” Regulators have already intervened, mandating “liquidity stress tests for these equity schemes” and asking fund houses to adopt measures such as “moderating inflows” to protect investors.