There was a cheer when India’s stock market registered the 100 millionth (10 crore) investor account. While that is an astounding number for most countries, it is just a fraction of the potential in India, with 1.4 billion (or 140 crore) people. Most market experts say the potential is three times more than the number. To have 300 million investor accounts would be an extraordinary development. That would be more than the population of the US and probably multiple times the number of individual investors in Europe.
Household savings are key drivers in an economy to finance growth. Surveys have shown that most savings are entered into physical assets in India. Most homes prefer to hoard real estate or gold. It is estimated that households in India have close to 24,000 tonnes of gold.
That is three times more than the Central Bank of the United States of America, the most influential central bank in the world. However, India needs households to deploy their savings into bank deposits and equity assets. That allows the financing of business expansion and creates new employment. Most Indian household wealth is still in physical assets like real estate and gold.
A new working paper published by the Reserve Bank of India shows that a lower unemployment rate increases the likelihood of household savings reaching financial asset categories like bank deposits, mutual funds and equity assets. It clearly shows that the risk appetite of households is enhanced with higher job security and regular income streams.
The decision to put the money into fixed deposits and post office savings is primarily based on the interest rates. Household savings find their way into guaranteed return schemes due to their simplicity. However, the same does not hold for real estate and equity markets. That could be primarily because real estate is not an easy investment in India, and equity markets are complicated to understand when the right time to buy or sell is.
Financial services
The encouraging trend towards financial assets means the future holds suitable for banking finance services like stock broking and insurance. The sheer demography will likely expand the scope of business that companies in the sector offer. More banking services will be required. Households need not just basic banking but everything that helps individuals and households save and put more money into fixed deposits and other savings products. They need to seek more life and health insurance.
They would have done it sooner if they had not done it now. The surge in monthly systematic investment plans is another example of how savings are finding their way into the stock markets. As households earn a higher income, their allocation into SIPs is enhanced. It is a gradual process.
While that happens, companies that offer financial services to us, like banks, insurance companies, stock broking companies and mutual fund companies, expand their business. For India to become a developed nation, it requires large banks like those in China and the US with a balance sheet size that is much bigger than now.
While that structural story unfolds, you need to think like an investor. Exposure to equity shares of financial services companies rapidly expanding their business is perhaps the most investible idea. There are multiple ways you can do that. You must engage a professional financial advisor to help you determine the correct allocation to the sector.
You can invest in index funds that track the Nifty Bank index. You can also own shares of top banks or listed stockbroking, insurance or asset management companies. If the financial services sector is going to boom and bloom, there is no reason why you cannot make the most of it.
Rajas Kelkar
(The author is editor-in-chief at www.moneyminute.in)