The attitude of Indians towards risk and return has shifted considerably over the last 30 years, even as the number of savings and investment alternatives accessible to them has increased by leaps and bounds.
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India’s gross savings rate has soared to over 30% of GDP in recent years from roughly 9% of GDP in the 1950s. These savings are contributions made by individuals and organisations in both the public and private sectors.
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According to the 2017 Indian Household Finance Report, Indian retail savers have traditionally placed their trust in tangible assets. The average household has 77% of its assets in real estate and 11% in gold, with just 5% of its assets allocated to financial assets.
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However, during the last five years, there has been a significant movement in favour of financial assets, with Covid giving a major boost. According to RBI data as of March 2020, households contributed almost Rs 40 lakh crore of the roughly Rs 64 lakh crore gross savings generated in FY20. Physical and financial assets got equal allocations of around Rs 23 lakh crore, with gold and silver getting approximately Rs 43,000 crore.
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Indian households were only increasing their financial holdings by Rs 10,000 to Rs 20,000 crore a year in the 1980s. By the early 1990s, with liberalisation creating new employment and opportunities, this had grown to more than Rs 1 lakh crore per year. The value more than doubled in the 1990s and has grown to more than Rs 22 lakh crore by 2020.
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This move has put substantial savings pools at the discretion of Indian financial sector operators, whether they are banks, insurance companies, mutual funds, corporate bond and equity issuers, or modern fintech platforms. Regulators of India’s financial markets are currently swamped with making policies for this constantly expanding group of participants.
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Until a decade ago, Indian investors rejected ‘paper’ assets such as equities and mutual funds in favour of valuable metals and real estate. The pandemic caused a significant shift in preferences. Households made a significant change in favour of bank deposits during the pandemic as a result of lockdowns and health emergencies, which could be smoothly transferred and quickly liquidated. As savers strengthened their savings, the deposit base held by Indian banks, which was at Rs 110 lakh crore in 2017–18, increased to Rs 151 lakh crore by 2020–21.
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Between March 2020 and October 2021, the stock markets had a dramatic rebound, and both new and experienced investors were lured to equities, mutual fund SIPs and even derivatives trading for significantly higher profits. The extensive use of technology to swiftly and effectively onboard investors without paperwork, as well as the simplicity of dealing through mobile applications and online platforms, has given this movement wings.
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In the past three years, the number of Demat accounts registered in the Indian markets has soared, and it is currently approaching the 10 crore mark. MF assets have more than doubled in the five years to more than Rs 38 lakh crore. This inflow of local funds has helped Indian equity markets to fare better than rivals in the face of recent FPI withdrawals and global turmoil. Covid has also provided term insurance and health insurance companies a much-needed boost, with Indians understanding that their finances are pointless without an emergency fund and risk coverage.
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It is too early to say if Indian investors’ growing fondness for stocks and mutual funds is just a result of recent returns or a realization that market-linked routes such as equities and mutual funds might produce inflation-beating returns in the long run. Since previous market dips have not caused any panic moves out of stocks or money market funds, it is hoped that this pattern will continue.