Nilesh Shah, social media celebrity and managing director of Kotak Mahindra Asset Management Company, recently tweeted about the flow of household savings in India into various investment vehicles. The summary of his tweet is that Indian households invest very little of their savings in stocks (or stocks).
Nilesh Shah, social media celebrity and managing director of Kotak Mahindra Asset Management Company, recently tweeted about the flow of household savings in India into various investment vehicles. The summary of his tweet is that Indian households invest very little of their savings in stocks (or stocks).
So how did Shah reach this conclusion? Total household savings from April 2020 to March 2023 was INR86.2 trillion. Of this, INR$31.6 trillion flowed into fixed deposits with banks and other institutions. INRMutual funds (MFs) and stocks received $5.1 trillion in inflows, accounting for about 6% of the total inflows. Considering this, the remaining 94% was invested in fixed income investments such as life insurance schemes, provident funds and pension funds, term deposits and small savings schemes.
Hello!Reading premium articles
So how did Shah reach this conclusion? Total household savings from April 2020 to March 2023 was INR86.2 trillion. Of this, INR$31.6 trillion flowed into fixed deposits with banks and other institutions. INRMutual funds (MFs) and stocks received $5.1 trillion in inflows, accounting for about 6% of the total inflows. Considering this, the remaining 94% was invested in fixed income investments such as life insurance schemes, provident funds and pension funds, term deposits and small savings schemes.
Now, this is a slightly lazy interpretation of the data, and it's what social media thrives on. First, a portion of the premiums that insurance companies collect from households are invested in stocks. Life Insurance Corporation of India (LIC) had investments in nearly 300 stocks as of December 2023, according to Bloomberg data. Along with this, private insurance companies are also investing in stocks.
Secondly, the Employees Provident Fund Organization (EPFO) invests a portion of the contributions made by individuals in stocks. In August 2022, the government announced in Parliament that 85% of the contribution will be invested in fixed income instruments and 15% will be invested in exchange-traded funds (ETFs), which will be invested in stocks that make up indices such as BSE Sensex and NSE Nifty. He said it would be done.
In August 2023, the government announced that EPFO will be INR1.29 trillion ETFs invested from April 2020 to March 2023. EPFO started investing in stocks only in 2018-19. In addition to EPFO, the National Pension Service also indirectly invests in stocks. Third, not all household funds that flow into MFs necessarily flow into equity funds that invest in stocks.
With the third point in mind, we also need to consider funds invested in stocks indirectly through the first two routes. If this happens, it is no exaggeration to say that more household funds will flow into stocks than before, albeit indirectly. Of course, we need more aggregate-level data in the public domain to arrive at precise numbers.
Now, while the point that Indians invest only a small amount of their savings in stocks is true on a broader level, the situation is not quite as Shah claims. So why don't households invest more in stocks?
First is the amount of risk people are willing to accept. The scars of the stock market fraud of the past few years still remain in the minds of many people, especially the older ones. They often equate investing in stocks with gambling. This is changing. But like any social change, it takes time. Of course, many investors now seem to be spending a lot of money on equity derivatives (particularly options) rather than buying stocks. A recent Bloomberg news report points out: “Indian investors did more deals in 2023.” [options contracts] Retail investors executed 35% of these trades and held the options on average for less than 30 minutes.
Second, MF was only allowed to use celebrities in advertising in 2017. This influence can be seen in the 'Mutual Fund Sahihai' campaign. When celebrities like Sachin Tendulkar and Mahendra Singh Dhoni say this word, MF becomes the first thing that comes to mind as an investment destination.
Third, the appeal of insurance as a tax-saving investment has been strong for many years, a selling point that insurance companies have built over decades. Of course, the sales potential of tax-saving MFs is quite limited. This should start to change with India's new income tax regime becoming the default option and the removal of tax deductions under Section 80C. Therefore, individuals need to invest in the future not only to save tax but also to invest well, and over time, investing in stocks indirectly through MF is much better than doing it throughout your lifetime. You will come to realize that this is the way to go. -insurance.
Finally, in 2019-20, the outstanding investment in MFs was only 5.9% of India's gross domestic product (GDP), but after hitting a high of 9.2% in 2021-22, it will continue to grow in 2022-23. It jumped to 8.7%. Part of this rise is due to investors putting more money into equity MFs, except during the pandemic year of 2020-2021. Furthermore, from April 2020 to March 2023, investors collectively withdrew funds from open-end income/debt MFs. Investment in life insurance funds increased from 19.3% to 22.2%. Investments in pension funds increased from 2.9% of GDP in 2020-21 to 3.3% in 2022-23 (data not available for 2019-20). Of course, in addition to new investments, rising stock prices also contributed to the rise. Meanwhile, banks' investment balance in fixed deposits shrank from 48.2% in 2019-20 to 46.6% in 2022-23. Clearly, therefore, households are holding more of their savings in stocks than before, albeit indirectly, and much, if not all, of it is held through MFs.
