Indian savers are now transitioning into investors from Fixed Deposits

Uday Kotak highlighted a shift as savers turn into investors, altering household financial portfolios. Bank deposits decreased from 53% to 42% by 2024, with Indian bank deposits at INR 215 trillion and mutual funds at INR 67 trillion. Factors like inflation, investment opportunities, and taxation drive this change. Investors are drawn to market investments due to better returns. Discussions on tax parity persist, emphasizing the need to adapt to evolving financial landscapes for optimal returns amidst changing tax structures.

In a recent statement, Uday Kotak, the visionary founder and director of Kotak Mahindra Bank, shed light on a significant financial shift where savers are transforming into investors, marking a balance in household financial portfolios. Kotak's social media post on September 17 emphasized this change, stating, "Bank deposits moved from 53% to 42% between 2020 and 2024. Future is a holistic approach to financial services. Time for mindset change."

Presently, the deposit base of Indian banks totals an impressive INR 215 trillion. In contrast, mutual funds' assets under management (AUM) amount to around INR 67 trillion, comprising approximately one-third (31%) of the total deposit base, a notable increase from 11% in 2014.

The question arises: what factors are propelling this financial evolution?

The interplay of inflation, investment opportunities, and taxation

A surge in inflation coupled with a sustained uptrend in the capital market post-Covid-19 has led numerous households to explore market investments, including stocks and mutual funds through SIPs. However, one often overlooked aspect is taxation, which significantly affects investment returns. Notably, post-tax returns are considerably lower for deposits, especially for investors in the 30% tax bracket, as illustrated below.

Wealth managers and financial experts highlight a growing awareness among individuals regarding the impact of inflation on their savings. They are actively seeking instruments that can outperform inflation. Moreover, the accessibility and simplicity of investing in the capital market, particularly through SIPs, have made investment options more attractive. Not to forget, the recency bias playing a role in this shift.

Exploring the tax implications

While fixed deposits remain a popular choice, particularly among senior citizens, there have been calls for tax parity with the capital gains structure. The recent FY25 Union Budget witnessed changes in long-term capital gains tax rates, underlining the ongoing debate on the taxation of different investment avenues.

Balancing risk and reward

Interest from deposits and annuities is considered regular income, akin to salaries and corporate profits. In contrast, capital gains signify a one-time receipt reflecting asset appreciation or depreciation. The risk associated with capital gains justifies their concessional tax treatment. Despite the tax differentials, understanding the risk-return dynamics of various assets is crucial.

Looking ahead

Financial experts emphasize that the government's taxation policies are designed with a long-term perspective in mind. While the current trend favors capital markets due to their attractive returns, market volatility can alter this scenario. Discussions on tax parity between bank deposits and mutual funds persist, with suggestions for a simpler tax regime for all investors.

As the financial landscape continues to evolve, adapting to changing tax structures and investment landscapes will be essential for investors seeking to maximize their returns while navigating the complexities of the financial world.