A time series analysis between mutual funds and bank deposits was conducted by Bank of Baroda economist Dipanwita Mazumdar using Granger causality test and Cointegration regression. The test results show no causality between mutual funds and bank deposits and the other way round as well.
“Statistical exercises to show a causal relationship do not lead to concrete results. The variables are not cointegrated as well, under different iterations. A plausible explanation could be that the cycles of MF outweighing BD are transient, and a very recent phenomenon. Besides, both the variables have been growing albeit at differential rates,” Mazumdar said.
Statistical test results
Granger Causality test from FY14-19 and FY20 onwards shows no causality between mutual funds and bank deposits and the other way round as well, after checking the prerequisite of stationarity. This contrasts with what we have seen for the full series, where one way causality turned out to be true, which was seen to be spurious later in the cointegration test, a report by Bank of Baroda said.
“In conclusion it is still not clear that there is a causal relationship statistically between growth in
deposits and mutual funds. Being a more recent phenomenon, the long-term time series did not show a significant trend for mutual funds in the past and hence this can be a reason for the absence of significant relations between the two. In terms of plain elasticities, there has been a lower number in the period starting FY20 when mutual funds gained in ascendancy,” the report said.
MFs vs bank deposits
The share of bank deposits in gross financial savings of households has fallen to 29.4% from its long-term average of 33%, whereas the share of mutual funds has risen considerably to 6% from 2%.
Also read | Mutual fund SIP inflows surge 10% to surpass Rs 23,000 crore for the first time
As banks are struggling to address deposit growth challenges, the blame has fallen to mutual funds where the AUM (assets under management) has grown more than two times in just 5 years to Rs 64.97 lakh crore. The fact that one can buy mutual funds at the click of a few buttons on their mobile phones and even possibly earn higher-than-fixed deposit returns has turned the compass from a traditional savings set-up to a market-oriented investment tendency.
“Growing risk appetite amid stable domestic growth environment and booming stock markets has resulted in this rebalancing of portfolio. Apart from this, growing financialization of savings, higher relative return and liquidity could be a plausible explanation for the shift,” the economist said.
Also read | Mutual fund SIPs hit another record high. Top 5 takeaways from AMFI data
RBI Governor Shaktikanta Das has been vocal about how banks are facing challenges in managing liquidity due to the shift in investment patterns.
“Households and consumers who traditionally leaned on banks for parking or investing their savings are increasingly turning to the capital markets and other financial intermediaries,” Das had warned last month.
A contra argument doing the rounds in favour of the asset management industry is that even if individuals are moving deposits to mutual funds, the money must finally rest with banks as it will only mean transfer from a retail to a corporate account.
“There is merit in this argument and this could possibly be the reason as to why we have not been able to determine a causal relationship in this analysis. Also both the variables have been increasing during this period and hence a negative relation is not visible even though the pace of growth in deposits has slowed down. Interestingly RBI data shows that on an annual basis the share of mutual funds in total deposits is insignificant and has not changed over time,” Mazumdar said.
(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)