The Mutual Fund Boom: Why India's Different

It was a tough day in the markets as the new 25% tariffs officially kicked in. These will apply from tomorrow morning in US time. India did try to negotiate and even involved an agency close to Trump, but that effort did not work.

• On the charts, Nifty looked extremely weak. The index fell like a knife and filled up most of the gap created five days ago.

• Hopes were dashed as Nifty Junior also slipped by 1.35%. Mid caps and small caps too closed in the red, with small caps falling 1.8%.

• Bank Nifty is the weakest of all indices, hitting a new three-month low.

• Gold saw some shine, rising 0.34% to 10,077 per gram, supported by a weakening rupee.

Other Market Triggers

• The heat map showed red everywhere, except for a few names like Maruti, Eicher Motors, Hindustan Unilever, and ITC. Most big names such as Sun Pharma, L&T, Reliance, Bajaj Finance, ICICI Bank, and Mahindra were hit hard.

• In the Nifty Next 50, only Britannia, Hyundai, Swiggy, and Dmart held steady. Stocks like Siemens, Havel’s, Canara Bank, Adani, and Vedanta dropped sharply.

• Ola Electric stood out with a strong 4.6% rise on news of PLI certification, showing relative strength in an otherwise weak market.

• On the other hand, Sun Pharma fell 3.4% after Trump’s comments about pharma pricing, which spooked the sector.

What to watch next ?

• A possible head and shoulders pattern is forming in small caps, which could mean more pain if levels around 16,250–16,300 break.

• The US president has already signed an executive order, so the tariffs are now confirmed. Whether there will be a rollback later is not known. The only relief is that not all goods are included and services are untouched for now. Still, many sectors will face a heavy impact.

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What To Read This Week ?

Mutual Fund Growth vs Bank Deposits: India’s Long-Term Market Opportunity

The U.S. Market: Stagnation in Mutual Funds

Data (past six years) shows a contrasting picture in the U.S. While bank deposits saw phenomenal growth, increasing from $12 trillion to $18 trillion, mutual fund Assets Under Management (AUM) remained relatively stagnant.

The AUM grew from $16 trillion to about $21 trillion but has not shown significant momentum since 2021, remaining at a similar level. This stagnation is possibly due to factors like increased interest rates making bank deposits more attractive and high valuations in the stock market.

The Indian Market: A Contrasting Growth Story

In stark contrast, India presents a robust growth narrative for the same period. Both bank deposits and mutual funds have shown impressive growth.

Bank deposits have almost doubled, while mutual fund AUM has nearly tripled, demonstrating a much faster rate of growth. This indicates that while Indians are saving more in banks, they are increasingly allocating their wealth to mutual funds, signaling a shift in investment behavior.

AUM as a Percentage of Bank Deposits: A Key Metric

A crucial metric highlighted in the discussion is mutual fund AUM as a percentage of bank deposits. This figure, which was 19% and dipped to 16% during the COVID-19 pandemic in March 2020, has now reached a healthy 28%. This growing percentage is a strong indicator of increasing market participation and liquidity. This trend suggests a long-term shift in how Indians manage their wealth.

The Long-Term Outlook

Based on this data, there is a significant long-term opportunity in the Indian market. While the AUM as a percentage of deposits in the U.S. is in the triple digits, India's current 28% suggests substantial room for growth. This figure is expected to continue increasing, potentially reaching 30%, 40%, 50% and beyond over the next few decades. This trend implies that liquidity will continue to flow into the Indian markets, as the country moves closer to the developed world in terms of stock market allocation.

Key Takeaways

• U.S. Market: Bank deposits grew significantly, but mutual fund AUM has been stagnant since 2021.

• Indian Market: Both bank deposits and mutual fund AUM are growing, with mutual funds growing much faster.

• Key Indicator: The AUM as a percentage of bank deposits in India has risen to a very healthy 28% from a low of 16% during the pandemic.

• Future Potential: The Indian market has immense long-term growth potential as the allocation to mutual funds continues to increase, aligning with a shift in saving habits.