Historically, Indian households have allocated a disproportionately high share of wealth to physical assets. An average Indian household holds majority of its wealth in Real Estate and Gold, with financial assets accounting for a significantly small component.
This is unusual in the global context. As per RBI’s Household Finance Committee Report(2017), more than 50 percent of households expect to rely on support from their children during old age, banking on the uncertain income-generating capacity of future generation. Thus, a large proportion of the nation's wealth being locked in largely illiquid assets, like real estate etc does not help either the country at large or the investors themselves in their old-age.
Recently, the trend has shifted away from illiquid assets and is more towards an increase in financialisation of savings. More importantly, a mix of financial savings has started changing in favour of capital markets as reflected in the increase in Demat accounts and SIPs.
Despite the recent increase, there is still a long runway ahead, as the overall equity allocation among households in India is less than 5 percent. From a long-term standpoint, equity as an asset class generates inflation-outpacing returns, and equities, especially Equity MFs, must be the go-to investment avenue for investors to create a retirement corpus over a 15-20 year time horizon, if not more.
India has an ambition to be a developed country in its Amrit Kaal. Humongous amount of risk capital is needed to meet India’s ambitious infrastructure development and growth objectives. Hence, an increase in depth of the capital market is so critical. Healthy domestic equity flows will also help the Government's asset monetization program while ensuring that ownership remains with its own citizens.
Even in the start-up ecosystem, there is an enormous need for risk capital. While, entrepreneurial ambitions of a young India combined with a funding boom has spelt a golden period for the start-up ecosystem, bulk of this funding has so far been from foreign VC firms. Looking ahead, getting Indian risk capital to fund entrepreneurial ambitions in the country is another goal worth pursuing.
Robust domestic equity flows make the equity market less susceptible to shocks from foreign capital flight – something which we witnessed last year when inflows in Mutual Funds helped to counterbalance FPI outflows and kept Indian equity markets largely resilient. This had a positive ripple effect on the overall health of financial markets, and in turn, macro-economic stability of the country.
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Strong domestic equity flows will, in fact, encourage foreign investors to invest more in India as the counterbalancing stability provided by domestic flows can add another positive dimension for those looking to invest here. Over the years, foreign investors have viewed India as one of the preferred investment destinations, owing to a structural growth story at the macro level and a diverse bottom-up stock-picking opportunity at the micro level. Stability provided by domestic flows and greater market depth can provide the third element of interest for global investors to allocate more to India.
Having wider participation in equity markets could enable more equitable distribution of wealth in the society as more people would be able to participate indirectly in the nation’s growth story.
—The author, Navneet Munot, is Managing Director & CEO, HDFC AMC. The views expressed are personal.
(Edited by : C H Unnikrishnan)
First Published: May 24, 2023 10:56 AM IST
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