- The changes that are visible in the economic firmament on the back of the pandemic-induced challenges make for interesting reading. Several alterations in the way citizens go about leading their respective lives are palpable in the aftermath of the once-in-a-century pandemic aftereffect. Consequently, hitherto considered risk-taking ventures are slowly being accepted as an explorable avenue. As the financial year draws close this week, it can be safely mentioned as representing an inflection point for the Indian equity market. Some number-crunching exercises will reveal curious insight into the way the money market is playing out.
PC: Nicedream30
- Note that so far in 2021-22, foreign portfolio investors (FPIs) have been net sellers of equity. People closely following the trend would vouch for the same as well. The net outflow was a huge $18.5 billion. Also, during the same period, major stock indices such as the Bombay Stock Exchange (BSE) Sensex have risen more than 10% as well. Understand that equity prices shrugging off such a huge FPI outflow represents a watershed moment indeed, no less. In other words, it symbolizes the rise of domestic investors, powered by households allocating a growing proportion of savings in financial assets. Mind you, this has long-term implications for resource allocation.
- Delving further will reveal that households are India’s main source of savings. No brainer indeed. As you are aware, traditionally they have allocated a greater share towards physical assets and a smaller percentage to financial avenues such as conventional bank deposits. Two trends are evident over the last decade. The data reveals that relative allocations to physical assets declined and were re-routed to financial savings. Against this context, the year 2020-21 was a milestone where the net financial savings exceeded that of physical assets. Of the Rs. 43.9 lakh crore household savings, 52.4% represented net financial savings.
PC: Freepik
- Of course, the lockdown of Financial Year 21 may have influenced the sharp decline in the relative importance of physical assets, but the trend was evident earlier. Remember, household savings flow into equities through multiple channels like EPF, NPS, mutual funds, insurance policies, and direct investments. All proxy indicators of equity-related savings point in the same direction. Systematic Investment Plans (SIPs) of mutual funds suck in larger amounts. In 2021-22, Rs. 1.12 lakh crore was raised, as compared to Rs. 43,921 crore five years ago. The data shows that 25.3 million active Demat accounts of residents at the end of February, up 68% over five years.
- Moreover, research outfit Jefferies estimated that 4.8% of the household balance sheet is inequities. As such, even as bank deposits remain the most popular avenue, relative shares among financial instruments are seeing a long-term change. Going ahead, the relative increase in financial savings and the linked drop in allocation to physical assets will be dominant influences. Thus, as household savings shift from bank deposits to equities, regulators need to ask if the retail investor is fully aware of a different risk-return equation. This transition needs to be accompanied by a focused financial literacy project spearheaded by scrupulous regulators.
