A financial inclusion revolution is underway in India. Numerous studies indicate a surge in the rate of conversion from savings deposits to equity investments. Records of demat accounts, mutual fund flows, and preferences for equity investments show the confidence households have in the prospects for the Indian economy. The latest monthly bulletin of the Reserve Bank of India highlights one multi-year study that shows a surge in equity inflows through mutual funds when prospects for India’s growth are bright. When prospects are relatively bleak, inflows into mutual funds weaken. The study also identifies three factors that discerning investors consider. These include an increase in demat accounts, fixed deposit rates and business confidence. All of that has translated into mutual funds managing a record of assets today compared to 15 years ago. If you look at the stock market, several asset management companies that manage your money have listed themselves. Their shares are trading at a multi-year high.
The growth in absolute cumulative monthly and total inflows into mutual funds does not tell you the whole story. The top valuation for mutual fund company shares in the stock market is not a result of the past. That is due to the low penetration of mutual funds in India compared to other rich nations. The same study shows that in the US, mutual fund ownership is 150% of GDP,compared to barely 15% in India. That shows the potential in India. The other issue is about the geographic spread in India. Mutual Fundholdings are mainly concentrated in the Western region. For example, Maharashtra accounts for a quarter of all the mutual fund holdings. That again presents an opportunity for mutual fund companies and their distributors to expand their reach.
The data suggests a lot is happening in the space of financial distribution and inclusion. However, the same bulletin includes the latest monetary policy report and the state of the economy review,which highlights worries about urban consumption. “Urban consumption revival, especially discretionary spending, is tepid,” it said. “During July, urban demand moderated with domestic air passenger traffic weakening due to seasonal factors and runway maintenance. Retail sales of passenger vehicles also declined,” it added. That means businesses would have to work harder to get the urban consumer to spend. If you analyse the RBI Bulletin data for personal loans, it will show that the demand for home loans is slowing, while there is a rise in the credit card outstanding and loans against gold and jewellery. There is a year-on-year decline in the demand for loans in the consumer durables segment. These factors suggest a weakness in urban markets where you are not willing to spend money. That is bad news for manufacturers in those sectors. Consumer sales of air conditioners and refrigerators in urban markets are tepid, according to most companies that have announced quarterly results.
Making sense of information
If you are new to the world of investing, the monthly RBI bulletin gives you a peek into the state of the economy. Nearly two-thirds of India’s gross domestic product is due to consumption. The information tracks monthly data on retail loans and other leading indicators that show the progress of economic activity. There are new ways to measure economic growth. The trend in monthly goods and services tax collection, e-way bills businesses pay to move goods across states, UPI, and other digital payment instrument transactions can give you a sense of the economic activity. These numbers must show a rising trend for the economy to perform well. If they show a monthly declining trend, that means the economy is likely to slow down. Those of you who are young can start building your own intelligence whiteboard and observe segments that could help you build a portfolio of meaningful assets.