Indians’ changing savings habit can tell what’s in store for this market
A wave of reforms implemented by the Modi government is making the financial asset class roar and the numbers are giving a different perspective.
The aim of cashless or a low-cash economy and the bold step of demonetisation have made things more transparent and Indian household are parking and shifting their savings from physical assets to financial assets, as clearly evidenced by the flows into various financial assets over the past two years.
Indians’ love for physical assets has resulted in diversion of a large chunk of their savings and most of their assets into gold and real estate. The huge increase in the number of mutual fund folios, domestic retail inflows into financial markets and the spurt in demat accounts all mark a strong shift to financial assets.
Balance sheets of Indian households exhibit a set of features that are unusual in the international context. As per the household finance committee report, the average Indian household holds more than 95 per cent of total assets in physical form (which includes residential buildings, farm and non-farm land, constructions such as recreational facilities, transportation vehicles, livestock and poultry, agricultural machinery and non-farm business equipment), and in gold or other forms of jewellery. Taken together, non-financial assets account for 95 per cent of the average household balance sheet.
The residual 5 per cent goes into financial assets (such as bank deposits and savings, publicly-traded shares, mutual funds, life insurance and retirement corpus).
Households in advanced economies hold substantially more financial assets than their Indian counterparts. In addition, households in these economies allocate a sizeable fraction of their wealth into retirement savings over the course of their lifetime. For example, retirement assets account for a relatively large share of wealth in advanced economies.
Over the past few months, a clear shift was visible in the savings patterns of Indians, as the following data points suggest.
According to Amfi, total inflows into mutual funds across equity, balanced and equity ELSS categories since January 1 this year stood at Rs 1,00,325 crore till September end. Close to 50 per cent of these inflows have been parked in debt to balanced funds, and the rest went into equity-oriented schemes.
The industry’s asset under management (AUM) stood at ₹20.40 lakh crore as of September 30, 2017, rising from ₹10 lakh crore in May 2014; which means the AUM doubled in three years.
The total number of accounts (or folios as per mutual fund parlance) as of September 30, 2017 stood at 6.20 crore (62 million), while the number of folios under equity, ELSS and balanced schemes, wherein the maximum investment is from retail segment, stood at 5.05 crore (50.5 million).
Indian mutual funds have currently about 1.66 crore (16.6 million) SIP accounts through which investors invest in mutual fund schemes regularly. There have been inflows of around Rs 5,000 crore per month through SIPs over the past few months, which demonstrates the power of Indian household savings and liquidity.
The spike in demat account was mainly because of investor interest in mutual funds, which have attracted a lot of retail investors, with systematic investment plans being the favoured investment route.
At the same time, a string of successful IPOs made phenomenal money for inventors in 2016-2017. Whopping subscription figures of recent IPOs and FPOs shows strong interest among retail investors in both primary and secondary equity markets.
The total numbers of investor accounts crossed the milestone figure of 3 crore at the end of October 31, 2017, out of which 16,423,446 were with NSDL and 13,624,432 with CDSL. Total accounts with both depositories stood at 2.5 crore last year and there was a growth of more than 20 per cent over last year’s.
The percentage of newly-traded clients and delivery-based volumes of retail participants on the exchanges have also seen an uptick over the past few months, indicating rising investor interest in equities.
Meanwhile, both gold and real estate are losing attractiveness. The government efforts to increase banking penetration through its Jan Dhan Yojna and the integration of PAB and Aadhar are expected to further increase the share of savings in financial assets.
The number of digital transactions in India has already increased manifold over the past two years and the access to investments on finger tips is likely to be swifter from here on. The said developments are likely to have more implications that can go beyond the stock market and beyond the economy.
With inflation and interest rates in a downtrend, we expect this change in savings pattern to be structural. For example, interest rates on most retail savings accounts have been slashed to sub-4 per cent while longer-term deposit rates have fallen by 200-300 basis points.
From the tax perspective also, based on an individual’s income-tax slab, the effective yield has fallen, which has made bank fixed deposits lose their attractiveness.
There is no long-term capital gains tax on equities. Hence, equities are likely to remain attractive from here on.
Domestic equity indices have set multiple records this year, as the mutual funds deployed a record of $14.7 billion, which was more than double the inflow from overseas investors into stocks.
The gush of local money amid falling returns from property and gold has helped the equity market move towards a new era. Thanks to the domestic inflows, which have reduced volatility in our market, the corrections in the index have been shallow over past few months.
Yet, retail investor participant in Indian equity market is less than 5 per cent, which is far less compared with other leading economies. In USA, nearly half the population invests in equities directly or indirectly. One-third of Singapore’s working population invests in the equity market. Even in Malaysia , this works out to 26 Read More…
Via:: Economic Times – Stocks