According to a recent report by Motilal Oswal Financial Services, fixed deposits in banks are emerging as a preferred investment choice over longer-duration debt mutual fund schemes. This trend is attributed to rising interest rates and the removal of tax benefits that long-duration debt funds once enjoyed.
Rise in Passive Investment Products
The report highlights that the demand for short-duration debt funds, particularly those with a maturity of less than one year, remains robust. This shift in preference is primarily due to interest rate hikes and the geopolitical tensions affecting the global financial landscape.
One significant factor contributing to the attractiveness of fixed deposits is the recent increase in interest rates. The 10-year bond yield in India has risen to 7.35% from around 7.0% in May 2023. Institutional investors are cautious and anticipate further yield hardening due to geopolitical uncertainties, which is causing them to hold off on longer-duration debt fund investments.
The report also notes that fixed deposits with maturities ranging from six months to three years are particularly popular among large institutions. These fixed deposits offer the flexibility of a Line of Credit, making them an appealing choice.
While there is some demand for floating rate funds, this category is relatively small within the overall debt segment. Additionally, debt index funds, which had previously seen strong momentum, have experienced reduced inflows.
The report also mentions an increase in product launches on the passive investment side, but it highlights that retail investors using distributors are not yet embracing these passive options. High-net-worth individuals (HNIs) are increasingly exploring the passive route, especially through wealth management platforms that allow them to invest directly. The report states that commissions for passive products can range between 25 to 40 basis points, compared to 90 to 100 basis points for equity schemes. However, the report predicts that the expansion of passive investment options in the retail market will take more time.
Fixed deposits in banks are gaining favor among investors, primarily due to the current interest rate environment and geopolitical tensions. While longer-duration debt funds are facing headwinds, short-duration debt funds and fixed deposits offer stability and flexibility to investors. Additionally, passive investment options are on the rise, with HNIs leading the way in embracing this approach.