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25
July 2017
 |
India(The Total Investment & Insurance
Solutions)
Indian
household savings patterns have been witnessing some massive structural shifts
of late. Households in India have historically been quite risk-averse and wary
of investing their savings into risky assets. A pursuit of safe bets has always
driven India towards making investments in unproductive assets like gold. This
pattern is slowly changing over time, especially since demonetisation in
November 2016.
In
the last decade and a half ending March 2016, as the GDP grew from Rs 0.23 lakh
crore to Rs 1.36 lakh crore, household savings as a ratio of GDP had fallen
from 22 percent to 19 percent. At the same time, financial savings as a
percentage of household savings has fallen from 45 to 40 percent. Thus, not
only had household savings been falling, the rate of financial savings as a
proportion of overall savings was also coming down. The allure of physical
assets had been increasing. The Total
Investment & Insurance Solutions
However,
post demonetisation, a non-linear shift towards savings in financial assets has
been noticed for Indian households. This is evident from the market performance
between October 2016 and January 2017 after foreign investors had withdrawn Rs
39,979 crore from Indian equities. Such a significant withdrawal a few years
ago would have resulted in a market rout. But this time, the stock markets
barely saw a dip of one percent in the four-month period. This is because as
foreign portfolio investors (FPIs) exited Indian markets, domestic institutions
stepped in to compensate with matching purchases of Rs 39,823 crores.
Mutual
funds have been the highest contributory factor to this trend of a domestic
move towards higher savings in financial assets. According to the Association
of Mutual Funds in India (AMFI) data, net inflows in 2016-17 have reached Rs
3.43 trillion, which is an astounding 155 percent rise from Rs 1.33 trillion in
2015-16 and the highest ever for the mutual funds industry in India.
Interestingly, retail investors have driven this expansion as much as
conventional corporate treasuries. This implies a growing proportion of
household savings being diverted into mutual funds. The Total Investment & Insurance Solutions
One
of the major driving force behind the rising clout of mutual fund has been the
growing popularity of systematic investment plans (SIPs). AMFI data shows that
monthly inflow though SIPs in April 2017 was Rs 4,269 crores as compared to Rs
980 crores per month in 2012. SIPs allow investors to make regular investments
in small amounts that go into equities instead of making lump sum investments
at various points in time. Post-demonetisation, this seems to be an appealing
alternative than holding cash or investing in assets like gold and real estate
for the risk-averse households across India. The Total Investment & Insurance Solutions
The
shift in preferences of Indian households towards financial assets is bound to
have a few positive outcomes for the Indian economy. First, as already
witnessed, higher domestic investment is making Indian equity markets less
vulnerable to foreign fund flows. With mutual funds owning more than 10 percent
of the freely tradable shares by value and insurers another 8-9 per cent,
domestic institutions command more than half the market clout of foreign
investors, who own about 40 per cent of the shares. This makes Indian markets
highly resilient to sudden pull-outs by the latter. The Total Investment & Insurance Solutions
Second,
the growing popularity of instruments like SIP is bringing stability in
domestic investment patterns as well. Since SIP allows investors to instruct
banks to invest a fixed amount each month, the short-termism in investor
behaviour has been eliminated. It takes away the temptation to closely watch
markets and impulsively react to its ups and downs. This also leaves domestic
mutual fund managers with funds to spare at all times in a significant break
from the past. The Total Investment & Insurance
Solutions
When
markets depended on lump sum investments, these investors were usually flush
with cash during bull runs and short of it in bad times. They would, thus, be
left with no option but to buy at highs and sell at lows adding adversely to
the market frenzy. Therefore, market stability is ensured in two ways with a
growing preference for financial assets; by acting as a cushion to the
volatility of foreign investments and by bringing in maturity in domestic
investment patterns.
However,
mutual funds are far from being the go-to investment option for Indians. In
FY16, MFs accounted for merely 2 percent of the gross financial savings while
bank accounts stood at 44 percent and provident funds and insurance at 36
percent. Thus, the potential for growth of financial assets in India is
massive. But, that growth will depend on the pace of growing affluence of
Indian households since individuals living at subsistence level cannot be
expected to invest in risky assets. Nevertheless, the changing pattern of money
flows in the Indian equity markets point to a promising future for domestic
investors. As John Maynard Keynes famously said: "The importance of money
flows is a link between the present and the future."The Total Investment & Insurance Solutions
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