From April 2020 to March 2023, Indian household financial savings totaled Rs. 86.2 lakh crore. Of this, 31.6 lakh crore went into fixed deposits with banks and other financial institutions, while 5.1 lakh crore went into mutual funds and equities, accounting for around 6% of the total movement. That is, just 6% has been invested in mutual funds or direct shares. The remainder of 94% went into fixed-income investments such as life insurance policies, PPF, PF, NPS, bank fixed deposits, and other modest savings plans.
Based on this statistics, we may conclude that Indian families invest just a fraction of their savings in equities. However, the data presented above is only half of the picture.
Insurance companies allocate a portion of the premiums they earn from households in equities. As of December 2023, the Life Insurance Corporation of India (LIC) has stakes in around 300 stocks. Likewise, other insurance firms also invest in equities.
Following this, the Employees’ Provident Fund Organisation (EPFO) invests a portion of individual payments in equities. 85% of EPFO funds are invested in debt instruments, with 15% going into exchange traded funds (ETFs), which in turn invest in equities. The EPFO began investing in stocks/ETFs only in 2018-19. Aside from the EPFO, the National Pension System (NPS) invests in equities as well. Of late, we can also see the traction among salaried people investing more in NPS.
You might claim that all of the household money that flows into mutual funds does not necessarily end up in equity funds that invest in equities. I agree with this logic, and while considering this in mind, the money invested indirectly in equities through the previous two ways should also be considered. When both of these factors are taken into account, we may confidently conclude that household investment in equities exceeds the 6% mentioned above.
The issue here is that these percentages of households investing in equities remains significantly lower than in certain other developed nations throughout the world. This is because people are historically accustomed to risk-averse investment avenues. Many people, particularly the elderly, continue to bear the wounds of previous stock market frauds and recessions (such as the 1992 scam, 2000 dotcom bubble, 2008 financial crisis, etc.). They frequently associate investing in equities with gambling. This is however changing. Yet, like any cultural reform, it will take time. In fact, many investors appear to be betting heavily on stock derivatives (particularly futures and options) rather than equities. This is however a danger sign though! In 2023, Indian investors transacted the most ‘options contracts’ globally. Retail investors accounted for 35% of these trades, with an average option holding duration of less than 30 minutes (which means majority of these trades have taken place intraday!). People’s attitudes about F&O trading must shift, because derivatives are created for major players like institutional traders and investors to hedge their positions, and not for retail investors.
Furthermore, the appeal of insurance as a tax-saving investment has grown over time, a selling argument developed by insurers over decades. However, this could start to change as the ‘New Tax regime’ now becomes the default choice, eliminating tax deductions under Section 80C. Therefore, people will now have to invest for the purpose of investing properly, rather than merely to save taxes, and perhaps, over time, they will learn that passively investing in stocks through mutual funds is a far better option than life insurance plans.
Celebrity promotional initiatives, such as the ‘Mutual Fund sahi hai’ advertisements, have drawn more individuals to mutual funds as an investment option in recent years.
Investments in mutual funds accounted for 5.9% of India’s GDP in 2020, rising to 8.7% in 2023. At the same time, the investment in bank fixed deposits fell from 18.2% of the GDP in 2020 to 16.6% in 2023. So, clearly, households are investing a greater percentage of their savings in equities than previously, although majorly through mutual funds. Hence, the changes are happening, and it will take some time for this transition to happen for the move of the Indian Households money from the traditional investment avenues to direct or indirect equities.