Mutual Funds vs. Bank Deposits: How Consumer Mindset Shift is Impacting Liquidity
The age-old practice of saving money in traditional bank accounts is undergoing a significant transformation as more and more consumers shift towards investing in mutual funds. This change in consumer behavior is now tightening the availability of funds in banks, leading to a reduced liquidity scenario. Adhil Shetty, CEO of BankBazaar, sheds light on this emerging trend, stating, “We’re seeing a consumer mindset shift. From a savings mindset, the consumer is moving to an investing mindset.”
This shift towards investment products like mutual funds is resulting in a decrease in the amount of money that banks have at their disposal. As a consequence, there is an anticipation of increased demand for short-term deposits, with one-year rates experiencing upward pressure. Long-term rates, on the other hand, may remain relatively stable.
Consumers, particularly senior citizens, can benefit from these short-term rate hikes, as they offer the potential for better interest earnings. However, the Reserve Bank of India (RBI) has chosen to keep the repo rate unchanged for the sixth consecutive time. Their decision is based on global uncertainties and the objective of reducing retail inflation.
The RBI has been following a policy of maintaining tight liquidity in the banking system, known as the “withdrawal of accommodation.” This approach aims to ensure financial stability and support economic growth. The central bank effectively manages liquidity through various tools such as open market operations, adjustments to the repo rate, and reserve requirements.
Data from the RBI reveals a significant decrease in the liquidity deficit in the banking system, dropping from approximately ₹3.46-lakh crore on January 24th to about ₹1.40-lakh crore on February 4th. Analysts, such as Jyoti Prakash Gadia from Resurgent India, view this development positively, highlighting the need for quick and flexible provision of liquidity by the RBI.
This shift from saving to investing reflects a broader trend in the financial landscape. Consumers are becoming more inclined to explore investment avenues rather than relying solely on traditional savings accounts. This change, while impacting the liquidity of banks, signals a transformation in consumer perspective and represents a significant shift from the archetypal saving mindset to the investment mindset.
As this shift continues to shape the financial industry, it is essential for both banks and consumers to adapt to the changing landscape. While deposit products may continue to play a role, mutual fund investments are becoming increasingly popular. This shift in consumer behavior not only impacts liquidity but also has broader implications for the overall industry and society as people seek greater returns and future financial security through investment avenues. Investors are advised to consult certified experts before making any investment decisions.
