Have Indians become bolder in their investment habits?

Last week’s headlines screamed that the “risk appetite” of Indians had grown as we had shifted away from saving through bank deposits to investing in stocks and debentures.

Investing in stocks and shares is riskier than opening a fixed deposit with a bank, simply because you have a higher chance of losing the principal value of your investment in the stock market, which is volatile. In a fixed deposit with a bank, your investments are safer and you are assured a certain rate of returns.

A shift towards equities

So to some extent, we can say that the risk appetite of Indians has increased, as more investors are indeed turning towards stock markets.

Inflows into mutual funds, at least through systematic investment plans or SIPs (where investors put in small amounts of money periodically, rather than invest a lumpsum) have increased. Media reports indicate that Rs 4,000 crores are being added to the mutual fund industry every month through SIPs, up from Rs 3,000 crores a year ago. Equity schemes would be a beneficiary of this increase in inflows. Moreover, with the Nifty near all-time highs of 9,000, it is safe to assume that retail interest in equities is high.

Second, the response to initial public offerings of shares of companies has been very positive, going by the oversubscription data. Oversubscription happens when the demand for a company’s shares exceeds the number of shares on offer. For example, Mahanagar Gas’s IPO and the private Ratnakar Bank's IPO which was oversubscribed 70 times in August, indicates increased interest in equities of private and public entities.

Third, the addition of mutual fund folios – an identification number for investors opening an account with a mutual fund – maintained a healthy growth of 2.1 million from April to August.

At first glance, all this does indicate an increased interest in the stock market. But this also comes after a stunning rise in the markets this year – the Nifty is up nearly 30% from end-February. A rising stock market attracts attention and money from retail investors – so this is neither new nor surprising.

Physical savings remain high

The increase in equity investment needs to be looked at in the larger context of savings.

The Reserve Bank of India divides India’s household savings into two categories – physical savings (net addition to a household’s physical assets, including investment in construction and machinery) and financial savings (currency, deposits, shares and insurance).

Between the two, physical savings have always been much higher than financial savings.

A table in RBI’s handbook of statistics on the Indian economy shows that physical assets accounted for 58% of household sector savings in the FY15 down from 66% in FY13.

Physical savings thus, have decreased, but still account for more than half the savings of a household.

Long way to go for equities

Table 12 of the RBI’s handbook provides a historical perspective of the pattern of India’s financial savings. It shows changes in financial assets and liabilities of the household sector over the past 40 years.

The table shows that currency, bank deposits, and insurance (life insurance and pension funds) remain the mainstay of Indian financial savings. Collectively, these items have accounted for at least 70% and, at times, almost entirely of all gross financial savings over 40 years.

Shares and debentures pale in comparison. They held the highest portion of financial savings in FY92 (incidentally, also the year of the securities scam led by Harshad Mehta) at 23% and have averaged just 3% in this decade.

In fact, the early 1990s stood out for having the highest proportion (an average of 15%) of shares and debentures as part of gross financial savings. The 40-year average, in comparison, is 6%.

Recent trends, admittedly, are encouraging since shares and debentures have risen from 0.2% of gross financial savings in FY11 to 6.5% in FY16. The last time a similar increase was seen was from FY04 (0.1%) to FY08 (9.6%). That period corresponded to the huge rally across equities.

Is this time really different?

Bull markets – those in which share prices are rising – attract investors and as markets boom, the proportion of shares and debentures to gross financial savings rises. That trend is playing out now and has happened before too. The only thing different this time is the monthly commitment through SIPs and the exposure to equities via insurance (unit-linked insurance product) are higher than in previous bull markets.

All in all, however, India remains a low-risk and fixed-income market. We will prefer to keep our money safe rather than increasing its value drastically but at a higher risk. A simple 7-8% return on a fixed deposit every year is, for most, more alluring than an uncertain stock market, the attractiveness of which only increases during bull markets.

The mutual fund industry has been trying hard to change this perception with the idea that over a sustained period (10 years and above), such schemes have the potential to provide good returns that can, at least, counter inflation. But it is yet to be seen if they will succeed in increasing investor’s risk appetite on a permanent basis.

Anupam Gupta is a chartered accountant and has worked in equity research since 1999, first as an analyst and now as a consultant. His Twitter handle is @b50.