Easing inflation has provided RBI with some space to reduce policy rates over the last 18 months. As a result, cost of funds for banks and another financial institution is coming down. Interest rates on deposits offered by banks have come down substantially over the last year or so. Lower inflation allows investors to earn higher inflation-adjusted returns even if the nominal interest rates come off. Unfortunately, many depositors do not realise this and become reluctant to invest in bank FDs under a falling interest rate scenario, as they perceive the fall as a straight loss.

What is an even bigger worry is this—investors have started scouting for other options to generate superior returns without realising the risk involved in each proposition. As revealed by the annual report of RBI for the Financial Year (FY) 2015-16, net financial savings have steadily gone up between FY 2013-14 and FY 2015-16 from 7.4% to 7.7% of the Gross National Disposable Income (GNDI). Within that, the proportion of shares and debentures has climbed from 0.4% in FY 2013-14 to 0.7% in FY 2015-16. Over the same time period, the percentage of deposits in financial savings has dropped from 5.8% to 4.7%.

Record growth in mutual fund folios sheds more light on the emerging trend. While the industry had added approximately 59 lakh new folios in FY 2015-16; FY 2014-15 had witnessed an addition of 22 lakh folios. Moreover, Assets Under Management (AUM) of the mutual fund industry have reached an all-time high of Rs 15.2 lakh crore in July 2016, while the asset base was 13.81 lakh crore in June.

This actually tells you who's gaining the share of the pie that banks are losing in the financial savings of the households. Small Savings Schemes (SSS) and tax-free bonds have also gained more popularity over bank deposits. Rising stock markets and the possibility of lowering interest rates on deposits further are making investors nervous.

Interestingly, the RBI annual report has done more revelations about financial decisions of Indian households. Financial household liabilities jumped to 3.0% of GNDI in FY 2015-16 from 2.5% recorded in FY 2014-15. Higher savings, growth in retail loans and increased risk-taking ability of households suggests that inflation expectations are moderating. In this context, the real rate of returns on deposits has improved, when you consider the comparatively lower risk involved in investing in them.

PersonalFN is of the view that, market movement and the recent performance of any asset class shouldn't be the deciding factors for your investments. On the contrary, you should focus on generating higher risk-adjusted returns to be able to fulfil your financial goals. A perfect asset allocation plan saves you from the risk involved in timing the market and taking hasty investment decisions.

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