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Informist, Thursday, Aug. 28, 2025

 

MUMBAI – Stronger economic growth increases both the capacity and confidence of investors to allocate more funds towards the equity markets, according to a paper by the Reserve Bank of India staff.

 

"An alternative analysis suggests that equity MF (mutual funds) flows do not predict real GDP growth, while real GDP growth does help forecast flows. This indicates that stronger economic growth enhances both the capacity and confidence of investors to allocate more funds toward equity markets," according to the paper titled 'Equity Mutual Funds: Transforming India's Savings Landscape'. The paper, authored by Mayank Gupta, Satyam Kumar, Abhinandan Borad, Subrat Kumar Seet, and Pratibha Kedia, does not represent the views of the central bank.

 

The authors highlighted that there is a rising preference for equity investments in India, particularly through equity mutual funds, which are witnessing continuous growth and resilience. "Despite a traditionally cautious approach to financial markets, the populace has shown a discernible inclination to embrace greater financial risk in their personal investment choices in recent years. MFs (mutual funds) have notably emerged as a favoured instrument in facilitating and accommodating this shift in financial behaviour," it said. The shareholding of mutual funds in companies listed on the National Stock Exchange has risen from 3.7% at the end of March 2010 to 10.4% at March-end 2025, according to the paper.

 

An empirical analysis in the paper shows that increasing financial inclusion, fixed deposit rates, and business confidence are the top three factors influencing equity mutual fund flows in India. However, the authors also cautioned that in an evolving scenario, closely monitoring the drivers of equity mutual funds may be necessary, as these have repercussions on household savings and the changing dynamics of domestic capital markets.

 

"Increasing retail participation, both directly and indirectly, also warrants more efforts toward investor education and protection to maintain the faith and trust of these new entrants," according to the staff paper. "As MFs (mutual funds) grow in size, a constant monitoring of risks emanating from their operations would need greater attention."

 

The paper also highighted that despite recent growth, India's mutual fund industry remains small compared to those of advanced economies, showing that there is still significant scope for expansion.  End

 

Reported by Pratiksha

Edited by Rajeev Pai

 

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