Indians have traditionally invested in fixed-income instruments which is gradually changing with the adoption of capital market product
The government has a chance this Union Budget to speed up financialisation of household savings and channelling of monies into the capital market through the managed investments industry.
Recent years have seen Indian households increasingly moving from traditional asset classes, such as real estate and valuables (mainly physical gold), to financial asset classes, like mutual funds (MFs).
According to the Reserve Bank of India (RBI), the share of financial savings increased to 52 percent in fiscal 2021 from 45 percent in fiscal 2016, while that of physical savings fell to 48 percent from 55 percent.
These financialised savings are increasingly being invested in capital market products such as MFs. Indeed, the share of MFs in the gross household financial savings pie increased to nearly 10 percent in March 2022 from ~7 percent in June 2018, while the share of insurance funds rose to ~24 percent from ~20 percent.
Adding vigour to this trend through focused steps at this stage can be a win-win for both the investors and the government.
Funnelling savings into capital market offers multiple benefits
Hedge against foreign portfolio investments (FPIs): The growing domestic investment industry has emerged as a strong bulwark against global factors. In terms of assets under custody (AUC), the total holding of the domestic investment industry is at Rs 135 lakh crore. This dwarfs the FPI holdings of Rs 51 lakh crore. The rise of a sticky domestic capital market thus protects the overall market from the hot flows of foreign investors.
Improved asset allocation: Indians have traditionally invested in fixed-income instruments (primarily bank deposits). This is slowly and gradually changing with the adoption of capital market products. Within the investment landscape, the share of equities has increased to 31 percent in 2022 from 24 percent in 2017.
Reach for Bharat: In addition to investors from metros, those from Tier-1 cities are participating in this transition. We are also seeing investors from Tier-2 cities moving gradually to capital markets. For instance, the share of B-30 (beyond top 30) cities grew to ~27 percent at end-March 2022 from ~10 percent five years ago, helped by higher incentivisation (30 basis points) for inflows from retail investors of these centres.
Budget can help industry realise its potential
While much has happened in the investment landscape over the past five years, the industry has not even touched the tip of the iceberg, considering the potential and the growth seen in developed countries.
Indeed, as per CRISIL MI&A Research estimates, the industry will grow exponentially to Rs 315 lakh crore in the next five years, led by a mix of macro and segment-specific factors.
In this context, here are a few steps the government can take to help the industry:
Ironing out tax differential: The investment industry faces arbitrage in terms of regulations and taxation between segments, which has a bearing on investment decisions.
For instance, within retail, tax benefits are extended to all investments in insurance and pension products, subject to the broad (Section 80C) and specific (Section 80 CCD) stipulations. However, MFs are bereft of tax benefit, except for the equity-linked savings scheme (ELSS) category.
At the time of investing, too, there are variances in product segments and asset-class categories.
Having a directionally similar taxation norms and regulations enable passing on similar messages to investors, allowing them to make informed decisions, based on their risk-return profiles, instead of grappling with the complexities.
Focusing on investor awareness: Investor awareness programmes such as the Mutual fund sahi hai campaign have played an important role in attracting new investors.
Between March 2017, when the campaign was launched, and the end of fiscal 2022, the industry had seen a total inflow of Rs 9.23 lakh crore – 30 percent higher than the previous five years.
Replication of this model of creating awareness across capital market products will help investors understand the various products and make prudent investment decisions.
Steps such as leveraging intermediation channels, introducing topics related to investments and savings in the academic curriculum, and gamification could help in this cause.
Widening distribution channels: Developing the intermediation system is an urgent imperative. Intermediaries — or distributors — not only add subscribers/investors, but also handhold them while spreading awareness and maintaining persistence.
Lack of growth of distributors is also linked to insufficient incentivisation. Incentivisation can lead to viable business models. To that end, a slab-based incentive structure and differential commissions for different geographies can help improve penetration.
A win-win for investors and the government
Having a developed managed solutions industry is beneficial for both the investors and the government.
India has one of the youngest populations in the world, with a median age of 28.7 years, which translates into a higher investment horizon and risk profile. The transition will provide this large investor base the opportunity to benefit from the capital market and derive optimum returns on their investments.
Further, adding domestic investor money to the capital market will reduce the impact of hot money flows of FPIs, reducing volatility and fluctuations and assuaging investor sentiment.
This money, in turn, can help bridge the funding requirement of corporates and startups in the country, propelling growth and aiding the government’s cause towards economic growth.
(The author's views are personal)
