For long, the middle-class in Asia’s third-largest economy has chosen assets such as gold or bank deposits—often called fixed deposits—to park its funds.
As they involve a fair amount of risk, less than 2% of the savings in Indian households are exposed to equities, compared to 45% in the US.
However, this is slowly changing now.
A higher portion of saving is now going into stocks and bonds, according to the Reserve Bank of India’s annual report (pdf). In 2015-16, the gross financial savings increased to 10.8% of India’s national disposable income from the previous year, RBI data shows.
“The increase in gross financial assets was driven primarily by a turnaround in small savings and increases in investment in equities and mutual funds, tax-free bonds by public sector units and currency holdings even as the growth in bank deposits held by the households moderated,” the report said.
Here’s how the investment patterns are changing:
While savings held in the form of currency or cash have seen an increase in the last couple of years, those in pension and provident funds have seen a slight drop.
Ready for the risk
This change shows that Indians are now more aware of options.
“Risk appetite of Indian investors is increasing. They take exposure to stocks through mutual funds via SIP (systematic investment plans),” said Shubha Ganesh, co-founder of Moneyshiksha, a firm that works towards investor education and financial literacy.
As a result, inflows into equity mutual funds are at all-time highs now, according to Ganesh.
“Gradually people are realising that the returns they get by investing in bank deposit is dismal and there are other avenues which will give them better returns,” said Kartik Jhaveri, director of wealth management service Transcend Consulting. “This typically happens when interest rates go down.”
The current rate of interest on fixed deposits at banks ranges from anywhere between 5.5% and 8.75% . Stocks, on the other hand, give much higher returns, depending on equity market performance, and also provide short-term liquidity.
With India’s stock markets expected to reach new highs, it isn’t surprising that retail investors, too, want a piece of the pie.