DISEQUILIBRIUM: Scripting a trend

India has always been a nation where household savings were predicated on a model of thrift. And while household savings are inextricably linked with economic growth, Indian households always preferred to park them in bullion and real estate.  Although in recent years this theorem has been tested with the savings rate dropping alarmingly. Savings rate in India declined to 31.6 per cent of GDP in 2015-16 from 32.3 per cent in 2014-15. In fact, domestic savings rate, which had touched a high of 36.9 per cent in 2007-2008, fell to 30.8 per cent of the GDP in FY12, down from 34 per cent in 2010-11. Savings rate is the share of gross savings in gross national disposable income (GNDI). The highest contributor to gross savings was the household sector. Although it accounted for a huge 59.2 per cent of the total savings, its share declined significantly from 62.0 per cent in 2014-15.

The decline stems from a decline in household savings in physical assets, which fell by six per cent in nominal terms. Gross financial savings of households, on the other hand, rose by 18.1 per cent and amounted to 34.4 per cent of total gross savings in 2015-16, as compared to 31.3 per cent in 2014-15. And herein lies the rub, for a new phenomenon of financialisation of savings is taking place rapidly in India. Nuclear families and DINCs (dual income no children families) within them are responsible for a new aspirational India where homes, cars and other things are required immediately. People are not waiting for retirement or close to retirement to purchase these things since ambition and incomes have both risen considerably since 1992. According to analysts, the slowdown in the savings rate takes resources away from investment, which is necessary for a developing country like India and this in turn, results in greater dependence on foreign capital. But with fixed deposits returns diminishing on the back of record low inflation, the returns across various fixed instruments is also dropping.

When I talk of financialisation, I am referring to how modern Indian families now more aware of equity and debt markets, mature with their investment calls are using the escalator of mutual fund SIPs to board the money train. In July alone, equity mutual funds saw a record inflow of Rs 12,727 crore, it marked the 16th straight month of inflows into equity schemes. The last time, there was a pull out from equity funds was as far back as March 2016 when Rs 1,370 crore was pulled out. Not to panic at the hint of a local or global crisis, staying invested and not flinching has turned this new mass of mutual funds into a counter weight to foreign portfolio investors. Even DIY (do it yourself) direct equity exposure every month in select scrips has become popular. So, a combination of direct and indirect equity exposure is driving this financialisation phenomenon. The wider dispersal of bites at mutual funds with states like Bihar and Jharkhand participating aggressively means that slowly but surely the equity cult is taking root. This works well with the bigger idea of channelising savings from traditional and orthodox asset classes like bullion and real estate, something that PM Modi has been advocating.

The total number of SIP accounts in India has grown at a pace that has shadowed the surge in interest on the product. In the past three years, the number of SIP accounts increased from 68 lakh to 1.45 crore in June 2017. In the past few months, about 7-7.75 lakh SIP accounts have been added with an average investment size of Rs 3,000 per account, according to the Association of Mutual fund of India (AMFI). The average ticket size of SIPs for the same period last year was around Rs 2,200. For instance, Jharkhand with a per capita investment of Rs 3,830 in mutual funds and Rs 12,600 crore of AUM accounts forms 0.6 per cent of the total AUM 9assets under management) in the country, while Sikkim has a per capita investment of Rs 15,010 in MFs — accounting for 0.1 per cent of the total AUM. Surprisingly, no fund house runs a branch in the state. According to Securities and Exchange Board of India (Sebi) data, the number of folios rose to 5,82,30,384 at the end of June, from 4,89,24,391 in June-end 2016, a gain of 93.06 lakh. The number of investor accounts stood at 5.54 crore at the end of March quarter. Folios are numbers designated to individual investor accounts, though one investor can have multiple accounts. Substantiating this discourse further, small towns contributed about Rs 3.5 lakh crore to mutual funds asset base by June-end, up by 46 per cent compared to June last year. Mutual funds’ assets under management (AUM) from B15 locations — small towns beyond top 15 (T15) cities — grew from Rs 2.4 lakh crore to Rs 3.5 lakh crore, as per Association of Mutual Funds in India (Amfi). Sebi has allowed more incentives for distribution of funds in B15 (beyond top 15 cities). Currently, B15 accounts for 18 per cent of the total assets of the industry. At the forefront are cities such as Ludhiana, Nagpur, Indore, Patna, Bhubaneshwar, Cochin, Rajkot, Guwahati, Coimbatore and Nashik et al have witnessed a surge in investors and assets.

With Sensex at an all time peak, investors have poured in a record Rs 41,000 crore in the first six months of 2017 in equity mutual funds compared to Rs 8,813 crore over the same period last year. In the month of June alone investors put in a net Rs 7,453 crore in equity funds. The last Sebi Investor Survey released a couple of months ago, but with data crunched upto 2016 said that more than 95 per cent Indian households prefer to park their money in bank deposits, while less than 10 per cent opt for investing in mutual funds or stocks. The survey, conducted across urban and rural areas of the country, showed that life insurance was the second most preferred investment vehicle, followed by precious metals, post office savings and real estate in the top-five.

Mutual funds came at sixth place (9.7 per cent), followed by stocks (8.1 per cent), pension schemes, company deposits, debentures, derivatives and commodity futures (1 per cent) as investment vehicles for the urban households. On a positive note, the survey found the investor base in India is increasing as nearly 75 per cent of the investors in the Sebi Investor Survey 2015 participated in the securities markets for the first time within the last five years. The survey using a bootstrapping methodology project estimated that there were a total of 3.37 crore investor households in India. Of these, 70 per cent (2.37 crore) reside in urban areas while the other 1 crore were rural households. Among these, mutual funds were the most popular investment instruments with nearly 66 per cent (or 2.2 crore households) investors. There were an estimated 1.9 crore households which invested in equities and 77 lakh household which invested in bonds (public, private and PSU). Among derivative instruments, there were 30 lakh equity and currency derivatives investors and 21 lakh investors in commodity futures. Amongst the equity investors, about 18 per cent (33 lakh) had invested in the primary (IPO) markets. The trajectory is upwards and it appears to be secular.

Indian and Chinese households (on average) hold roughly 76 and 82 per cent of their wealth in real estate respectively. However, Indian households hold more durable assets than the Chinese households whereas the extent of financialisation of the household balance sheet is greater with Chinese households than Indian ones. Furthermore, the household allocation choices are very different in India and China when compared with more advanced economies. On average, holdings of real estate account for lower fractions of total savings in countries such as the US (43.8 per cent), and particularly Germany (36.7 per cent). A 2016 NCAER paper on Indian Household Savings Landscape states — Decomposing these savings into physical savings (in assets such as gold and real estate), and financial savings (invested in claims such as deposits, debt, and equity), a striking feature of the Indian data is that Indian households have increasingly favoured physical over financial savings. To provide some context, in 2011-12, nearly 70 per cent of aggregate annual household savings flow into physical assets, with comparable ratios in the average household wealth allocation (accumulated savings) being much higher. Further, it finds that inflation experiences seem to drive Indian households specifically towards investments in gold more than other physical assets.

Mutual fund SIPs have proved to be the vehicle of change, bringing in more and more of the uninitiated, giving them a taste of the secret sauce. Unlike the past, a bull run and better research on the part of professional managers is also helping in building the faith.
sandeep.bamzai@mydigitalfc.com

Columnist: 
Sandeep Bamzai