The ratio of MF assets under management to total bank deposits has more than doubled in 10 years.
Mutual funds are increasingly becoming a strong alternative to traditional bank deposits as an investment avenue, particularly among India's aspirational middle class, according to the latest bulletin from the Reserve Bank of India.
The ratio of MF assets under management (AUM) to total bank deposits has more than doubled during the 10-year period ending March 2024, rising from 10 per cent to 23.8 per cent, the central bank noted.
The MF AUM is now nearly one-third of the bank deposits. In July 2025, MFs had an AUM of Rs 75 trillion, equivalent to 32.3 per cent of the bank deposits at nearly Rs 232 trillion.
The rising MF penetration, according to an analysis of past RBI data, can be attributed to the growing familiarity with the equity market, lower fixed deposit rates, and optimism about the business environment in the country, which play a significant role in driving flows to equity MFs.
'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 study noted.
In the past decade, MFs have witnessed rapid growth in popularity, supported by higher income levels, rising financial awareness, a young investor base, deeper internet penetration, and the expansion of digital platforms.
'The success of the marketing initiatives led by the Association of Mutual Funds in India (Amfi) is leading into buildup of trust,' the RBI bulletin stated.
AUM of the MF industry has grown from Rs 6.1 trillion in March 2010 to Rs 65.7 trillion in March 2025 at a compound annual growth rate (CAGR) of 17.1 per cent.
The rising popularity of MFs is also visible in the segregated household investment data.
The share of MFs in the household sector's gross financial savings increased from 0.9 per cent in 2011-2012 (FY12) to 6 per cent in FY23.
However, despite the sharp growth, India's MF penetration remains modest compared to advanced economies, suggesting substantial room for growth.
With favourable demographics, rising incomes, and expanding digital access, MFs are expected to attract an increasing share of household financial savings.
'As India progresses towards a $10 trillion economy, equity MFs are likely to become a cornerstone of household savings, providing a vital channel for mobilising long-term capital,' the RBI bulletin stated.
The report also cautions against risks arising from concentration in relatively illiquid market segments.
Equity MFs collectively hold over Rs 14 trillion in smallcap and midcap stocks, accounting for more than a quarter of their total holdings.
In the event of large-scale redemptions, liquidity pressures could spill over to the broader market, though the Securities and Exchange Board of India has put in place measures to prevent such an incident, it noted.
Feature Presentation: Aslam Hunani/Rediff