Although money can’t buy everything, it may undoubtedly have a significant influence on your personal well-being. Making a financial plan and engaging in wealth-generation stand out as strategies for reducing financial stress and enhancing personal happiness.
Yet, a recent poll found that the majority of Indians do not save enough. Most people save between 0 and 20% of their income, while 20% save between 20% and 30%. India’s population as a whole favors fixed income products like PPF, fixed deposits, recurring deposits, savings accounts, etc.
Indian flavor of investments:
While many investors have historically favored low-risk, steady-interest choices, bank accounts and deposits make up the majority of Indians’ financial assets, with mutual funds accounting for just 7% of total assets.
Non-financial, tangible assets like gold and real estate are popular among Indian investors. Endowment funds and annuities are also often purchased by Indian investors. Gold is often purchased in its physical form, acquired over a lifetime, and used to transmit wealth between generations.
The majority of Indians desire to buy a home, and many also invest in real estate for capital growth and revenue generation. This makes it another well-liked investment option.
77% of Indian households’ total net worth is made up of real estate, which includes buildings and lands. A large portion of this wealth is made up of home equity since Indian households have a tendency to pay off their mortgages quickly in order to become the sole owners of their homes.
Despite a large increase in the previous ten years, just 7% of Indian assets are in the mutual fund market. This is a stark difference when compared to USA, where 45% of assets are invested in mutual funds. For ordinary investors, the Indian mutual fund market may be safer than other risk-taking strategies like derivatives, cryptocurrencies, or NFTs, because of its robust regulation. Notwithstanding the modest allocation to mutual funds, investors have shown a strong preference for stocks in recent years due to India’s comparatively favourable capital gains tax on stocks, which is a major incentive for people to invest.
Home bias is close to 100% in India due to the difficulty of local investors to invest abroad. The regulator permits domestically domiciled funds to make direct investments in international securities or foreign feeder funds, however there is a total industry cap. In the event that this cap is exceeded, funds are closed to new subscribers. These limitations restrict the potential for diversification into international assets.
Question of social security:
A greater amount of conservative nature of money stashed as cash and deposits to ensure financial security may be explained by India’s less developed investment culture and the country’s relatively small social security net as compared to western nations. Because of this, middle-class and widely wealthy Indians are unable to rely on social security and are forced to accumulate money in order to achieve their financial objectives, including retirement.
According to the Reserve Bank of India’s study on household finances, more than half of Indians presently rely on their children for financial assistance during retirement. For retirement, fewer than 10% of households depend on their financial assets. With the introduction of the National Pension System in recent years, a transition to a defined-contribution-focused pension system is under way among the people in India.
Financial Literacy in India:
Financial literacy is low in India, with only 27% of Indians being financially literate. Because of this, it is incumbent upon all institutions, including exchanges and SEBI, to determine how best to spread the message of financial literacy throughout the nation. The fund industry and regulators have made significant progress in the recent years in providing investor awareness. For instance, SEBI has established a ‘National Centre for Financial Education’ in collaboration with other regulators like the Reserve Bank of India, the Insurance Regulatory and Development Authority of India (IRDAI), and the Pension Fund Regulatory and Development Authority (PFRDA). This centre aims to educate Indians on fundamental topics like the distinction between saving and investing, the power of compounding, the time value of money, and the significance of diversifying your investments, among other things.
Conclusion:
The two extremes of one’s financial planning gamut are saving and investment. Those who embrace investment experience more well-being because they feel more in control of their wealth generating process. Yet, most Indians still invest their money in conservative tax-saving vehicles like five-year fixed-rate deposits (FDs), PPF, etc., or choose to leave it sitting idle in their bank accounts.
It’s interesting to note that Indian millennial (those under the age of 35) are significantly more likely to let their savings accumulate in their bank accounts than those over the age of 35, who would rather invest their money. This shows a maturity in perceiving financial planning on the part of the people more than 35 years of age. So, this level of financial maturity is essential right now, and with the help of institutions and regulators, the gap in financial literacy will close over time.
