mutual funds growth FY25: Bank investments in MFs soar 91% in FY25 amid subdued lending, surplus liquidity

Banks’ mutual fund investments jumped 91% year on year to Rs 1,19,863 crore as on March 21, 2025, from Rs 62,499 crore on March 22, 2024, data from the Reserve Bank of India (RBI) bulletin showed. Banks’ MF investments had grown 28% in the previous year.

These non-SLR (statutory liquidity ratio) investments are remunerative treasury operations that banks engage in with surplus funds in the absence of attractive lending opportunities.

“Besides suboptimal credit growth, bank investments in mutual funds schemes have gone up due to surplus liquidity conditions, favourable market conditions and relatively faster execution” explained Vinod A N, general manager and treasury head at South Indian Bank.

Venkat N Chalasani, CEO of Association of Mutual Funds in India (AMFI) and a former State Bank of India deputy managing director, said, “Most of these investments are in liquid and money market schemes, which is also reflected in the overall mutual fund investment numbers where investments are in zero risk short-term debt instruments such as treasury bills where returns are comparably higher.”

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AMFI data for MF assets under management (AUM) in March 2025 shows that over 40 % of the funds are parked in liquid schemes. The returns on such investments can go up as high as 7%, while comparable treasury bill yield is around 5.9%Deploying surplus liquidity in MFs for a short-term period helps banks in asset liability management—to execute a bullish interest rate view and higher yield with the benefit of diversification without sacrificing the quality, exports said.“Unlocking of liquidity is relatively better in the form of MF redemption when compared to direct investments,” Vinod said.

Banks’ MF investments are expected to remain positive in 2025-26, depending on multiple variables like liquidity, interest rate view, credit growth, etc. “However, repeating the sharp jump (of FY25) is a tall task,” Vinod said. “I expect moderate growth in MF investment for the rest of FY26.”

Chalasani of AMFI expects banks’ MF investment interest to be strong as the central bank has changed its liquidity stance from neutral to accommodative, leaving scope for sustained surplus liquidity.

One of the restrictive factors, however, is higher risk weights on these investments for banks which is linked to the quarter end investment positions. Hence, a longer trend of bank investments in MFs show a significant amount of pull-outs during the quarter ending period.