BENGALURU: Indian retail investors have come a long way since their independence in 1947 when it comes to channelling their savings to financial instruments. They were traditionally less savvy investors, mostly investing in physical assets like gold and land. And whatever little household savings that came into financial instruments, they were mostly in bank FDs and small savings schemes.
In 1950-51, only 9% of the household savings were parked in financial instruments. The rest all were in physical assets. But this changed fast over the next two decades probably largely due to two significant events - the nationalisation of Life Insurance Corporation (LIC) in 1956 and the advent of mutual funds with the incorporation of Unit Trust of India (UTI), India’s first mutual fund.
In the next couple of decades, financial savings accounted for 30-35% of household savings.
Nationalisation of LIC
Nationalization of LIC was a big boost to financial inclusion of a large number of people in India. In 1957, LIC garnered Rs 200 crore in new business premium, and it took 13 years to cross Rs 1,000 crore new business premium in 1969-70.
“Despite looming economic challenges, the government started addressing subjects related to wealth and financial stability at a household level relatively early,” says Nirav Karkera,Headof Research - Fisdom.
The formal inclusion of the post office savings bank in the constitution happened in 1949, and the mutual fund industry in India started in 1963 with the formation of Unit Trust of India. ”Furthering the small savings agenda, the mid-20th century Government Savings Certificate Act and Public Provident Fund Act were used as the foundation to launch several schemes to develop the small savings culture in India,” Karkera explains.
And while by the 1980s, a large chunk of household savings was coming into financial instruments like insurance, bank FDs and post office small savings schemes, it was not until the 1990s people were investing in equities.
Equity investments get a boost
Post the liberalisation, there has been a drastic change in the investment options that are at disposal of investors now, says Dev Ashish, founder, Stable Investor. Slowly in the 1990s, equity investments started gaining popularity. The growth of Indian stock markets in the last three decades has shown the potential for wealth creation for everyone.
The growth in equity investments in the 1990s was marked by a couple of very important events - formation of the Securities and Exchange Board of India (Sebi) as the regulator of the securities market in 1988, and the entry of private mutual funds in 1993.
Of course, a new wave of PSU bank-backed mutual funds had already entered India’s investment scenario in 1987, but it was the private mutual fund players who gave the industry a new flavour and taught investors less risky ways of investing in stock markets - through Systematic Investment Plans (SIP) “Hence, the middle-class Indian now wants to participate in this and benefit. As of now, Indians are pumping in close to Rs 12,000 crore every month via equity funds alone. This is a figure which would have been hard to believe just a few years ago,” says investment advisor Ashish.
Pension savings get a boost with NPS
India has a robust retirement benefit infrastructure largely categorised as either a lump sum retirement benefit or an annuity pension plan. ”The opening up of the National Pension System (2003) and Atal Pension Yojana (2015) to non-government employees has opened up as a strong investment avenue for the general public, and has been pivotal to include a major segment of the population - the ones employed within the large unorganised segment of the economy that construes a major share,” says Karkera.
The size of the pension assets is Rs 35 lakh crore, of which 22% - Rs 7.72 lakh crore is with the NPS. Supratim Bandyopadhyay, chairperson of PFRDA (Pension Fund Regulatory and Development Authority) recently said that over the 13-year period, we have given a CAGR of 10.27%. He added that they have always given investors an inflation projected return.
Fintech boom
Apart from these, new technologies into offerings of financial services companies have changed the entire personal finance landscape. Customers can be onboarded within a few minutes by fintech and online trading apps.
Fintech firms offer interactive tools to their customers that can track capital markets and provide them enough data in making educated choices. A recent report by Chiratae Ventures with Ernest and Young (EY) says that the Indian fintech market is expected to record a 10x growth and to achieve $1 trillion in Assets Under Management (AUM) and $200 billion in revenue.
However, India still lags most major countries of the world in terms of AUM funds as a percentage of GDP. “This relatively low penetration provides a large potential and opportunity for strong growth ahead. Earlier, it was about getting a LIC policy in the name of investment. But more and more people are realising that traditional endowment-type plans aren’t suited for proper investment needs,” says Ashish.
He adds that there is still a lot of mis-selling happening at various levels in various products. But regulators are gradually cleaning up the age-old mess and things will only get better from here.
Key milestones in India’s investment ecosystem post 1947