To gold or not to gold? How Indians are changing the way they invest

Indian Investors’ Change Of Heart

Investment habits of Indians have been going through a transformation lately. Individuals are going against conventional wisdom when it comes to investing their personal savings and preferring financial assets over physical assets. This phenomenon is being widely reported by financial planners all over the country.

Definitions:

Financial Assets:  

Direct Equity, Fixed Deposits and bonds, Insurance, Savings Deposits, Cash, Provident Fund, NRI Deposits, Small Savings, Mutual Fund, Current Deposits, Pension Fund, Alternate Assets, International Assets.

Physical Assets:

Gold, Real Estate, Diamond, Silver, Platinum.

Alternate Assets:

Complex in nature, less liquid and non-traditional these investments include venture capital funds, private equity funds, gold ETF, structured products & real estate funds to name a few.

International Assets:

Investments done by resident Indians in financial assets overseas, under the Liberalized Remittance  Scheme (LRS).

Key Takeaways

Direct Equity has been the flavor of FY15 becoming the largest asset class of investments.
Retail investors’ preference for Mutual Funds skyrocketed.
Investment in physical assets declined with gold and real estate losing sheen.
New money being invested, is going into financial assets.
The total wealth held by individuals in India has grown by 8.9% to Rs 280 Lakh Crore.
Over the next 5-10 years, financial assets are expected to grow at a much faster pace than physical assets.
Indians’s wealth allocation will become in line with the global proportions in all Asset classes.
The GDP growth rate for FY16 is expected to be at 7.5% and the economy is expected to grow at 8-8.5% in the next 3-5 years indicating huge growth potential in personal wealth creation for all individuals.
Platinum and diamond are expected to grow faster than the other physical assets.
Several initiatives of the Central Government towards financial inclusion such as Pradhan Mantri Suraksha Bima Yojna will go a long way in increasing household savings rates and also financial investments across all strata of society.
Financial Vs Physical Assets

Financial Vs Physical Assets

Financial Vs Physical assets FY20

Financial Vs Physical assets FY20

The Numbers:

As Indians, this information may come across as being counterintuitive. However, numbers don’t lie. According to Karvy Wealth Report, as of FY 2013, 55% of household savings was invested in financial assets (such as equity, bonds, cash, mutual funds and pension funds) while the remaining 45% was in physical assets (real estate, gold, silver, diamond and platinum).

Overall, individual wealth grew by 8.9% with investments in financial assets increasing by 19% and physical assets declining by 2.3%. Direct Equity became the single largest asset class contributing to Individual wealth in India. This has been one of the key drivers of the growth in wealth, which increased the value of existing assets. Equity is projected to witness a continuation of the growth trajectory for the next few years.

This is essentially statistical proof of the ongoing shift in saving habits and change in returns of traditional assets.

Indians financial asset allocation

Indians financial asset allocation

Driving factors

What exactly is bringing about this change in preferences? Are the changes here to stay?

Gold and Real Estate losing charm:

For starters, physical assets such as gold and real estate are not bringing the kind of returns that investors hoped to receive. India is considered the highest consumer of gold in the world (642 tonnes in 2015) and yet, the unexpected fall in gold prices shook the investors’ convictions. Similarly, real estate sector has seen a sluggish performance in the last couple of years with stagnating prices and a worrisome demand-supply lag.

Real estate investments come with other complications such as the requirement of large amounts of investment (REITs have not picked up as expected) and the inherently illiquid nature of the asset. Property prices are seeing correction and new property launches have reduced drastically. This slowdown is being driven by a mix of factors such as banks pulling back on lending to developers, huge unsold inventory and a draconian black money bill that has struck fear among speculators. Rental yields in India are also extremely low. Additionally, real estate is also a relatively unregulated sector.

Physical Asset allocation pie

Physical Asset allocation pie

As for gold, as a source of investment it not only costs money to hold, it also does not bear interest. Focusing purely on gold investments also has serious ramifications for the growth of the economy.

Gold and real estate have yielded muted returns in the last two years and are turning less attractive due to increased regulations. Equities, on the other hand, have outperformed significantly. Hence, there are early signs of domestic investors favoring direct equities and Mutual Funds over other assets. History suggests that investors preference towards an asset class lasts many years. We may well be at the beginning of this lasting shift in investors preference towards financial assets in general and equities in particular.

Controlled inflation rate:
In an economy that has high inflation, investors are drawn towards physical assets whereas with low inflation they naturally veer towards financial assets. Given that the government has robust policies in place to control the inflation, financial assets are bound to see a continued upswing.

India’s position among Global and Emerging markets:

Among the emerging market (EM) peers, India remained in a bright spot amid a slowdown in global economy on the back of multiple rate cuts by the RBI and its efforts to keep inflation under check and capital infusion by the domestic investors and Foreign institutional investors.

Urban drive:

The economy in the urban regions of the country has been faring well in the recent past. This facilitates higher levels of savings which in turn get routed to financial assets. People see value in investing their hard earned money in more liquid and return oriented financial assets.

Government initiatives:

The current government has taken beneficial stands on issues such as digital transactions, discouraging cash economy and financial inclusion that will continue to make investing in financial assets easier and straightforward. Other initiatives such as Make in India, Digital India, 100 smart cities increased optimism among domestic investors and foreign investors. Also the Government has attempted to make business environment more conducive for foreign investors.

Renewed interest in Mutual Funds:

Investor approach is also undergoing a radical change. Where people were once satisfied to invest in passive avenues such as realty and let its value grow, investors now seek active means of investment that promise faster growth and higher returns and can be tracked online.

Equity mutual funds growth

Equity mutual funds growth

Over the last decade, many people have come to realise the benefits of investing in mutual funds. Tax efficiency, online paperless investing, easy KYC procedure and SEBI’s initiatives like stringent disclosure norms, higher governance standards for asset management companies made mutual funds one of the most transparent financial instruments available to retail investors. The mutual fund industry continued to gain on assets under management, hitting a record average AUM of Rs 13,58,559 crore for the quarter ended March 2016.

Over the last one year, the average AUM of MF industry rose by Rs 1,63,940 crore or 13.7 per cent. Industry experts say that the retail investors have brought in this change with mutual fund investments.

Investor awareness programmes:

Investor awareness programmes, coupled with adoption of districts and steps to re-energise the MF industry by Sebi, have resulted in higher participation from beyond the top-15 cities. AMFI conducts almost 1000 investors awareness programmes per month. SEBI had also asked fund houses to set apart 2 bps for investor education and awareness initiatives. Mutual fund houses have adopted around 188 districts across the country for the Financial Literacy Campaign. Together all these have helped increase financial literacy and participation in capital markets.

Stock market performance:

In the year 2016, equity market performance will be driven more by real performance rather than by expectations. This will augur well for retailers.

Financial Technology Innovations:
The entire process around investing in financial assets such as equities and mutual funds is being simplified and streamlined everyday by financial experts. Even individuals with very little know-how of financial assets but desire to invest can now get started with minimal effort. Products like FundExpert, FundsIndia and Scripbox will be the flagbearers of digital innovation in the FinTech space. FundExpert will allow first time and seasoned investors to stay invested in Mutual Funds and reap the benefits of our power of algorithms that will work 24×7 to maximize the returns of your portfolio.

Finally, choosing to divert investments from physical assets to financial assets can bring a host of benefits. The new asset classes can be bought and tracked online, which is now a mandatory requirement for the new breed of millennials and digitally savvy investors. Additionally, the country can also look forward to higher growth in economy brought about by productive use of retail investments in equities.

About the author

Nisha Achuthan

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