India has always had a culture of savings, and like they say, old habits die hard. So it comes as no surprise that from 2012-13 to 2015-16, the net financial savings of households grew from 7.2% to 7.7% of the Gross National Disposable Income (GNDI). However, there is also change in the air, as Indians are gradually shifting away from deposits when deciding where to put their savings.
Indians households are increasingly putting their money into equities and debentures, choosing these higher risk avenues over traditional ones like fixed deposits, according to the 2015-16 annual report of the RBI. The share of equities and debentures grew from 0.4% in 2014-15 to 0.7% in 2015-16. The share of deposits meanwhile, fell from 4.9% to 4.7% in the same time frame. Of course, the shift is still slow, and despite the decrease, deposits occupy the highest share in household investments.
While the shift to equities and debentures is small, financial planners like Gaurav Mashruwala insist that it is still a significant shift. And younger generations, in particular, have the advantage of the internet, which, Gaurav says, makes them more confident about putting their savings in non-tangible assets. â€śInformation about the equity market is now available at the touch of a button and the ease of doing transactions has also increased manifold,â€ť he adds.
Another factor contributing to the decreasing preference for deposits is the falling interest rate. According to a report by Allirajan M in the Times of India, most banks provide a rate of interest of about 7.25% on a one-year deposit. â€śThe annual returns from a bank FD is only around 4.9% on a net basis for a person in the 30.9% tax bracket now. This would not be even able to match the average CPI (consumer price index) inflation of 5.24% in the last one year,â€ť the report says.
Dhirendra Kumar, CEO of Value Research (a website providing investment advice, analysis and information), says that low inflation has contributed to low interest rates on fixed deposits.
â€śFewer people are willing to put money into fixed deposits, which contributes to their decreasing popularity. Even the older generation, who would ardently put their savings into deposits, are now upset with the lowering returns on interest,â€ť he explains, adding that the willingness to invest in equities and debentures is across the board, and not just in the younger tech-savvy generation.
Gaurav also points out that awareness about wealth creation over simply conserving savings is also increasing. And given that the equities market has been rising and becoming more stable in the last couple of years, it is becoming a lucrative option, Dhirendra says.
Dhirendra feels that the change of national government in 2014, and the perception of the current government as pro-economy helped build peopleâ€™s confidence. Later reforms like the GST bill and SEBI incentivizing mutual fund investments by providing tax benefits also contributed to the move away from deposits.
Gaurav says that this is a welcome trend, but will take time to become dominant. The advantages, though, are significant: â€śIt helps capital markets grow by making capital generation easier for companies. This is also good news for start-ups. For the common person, it means more avenues to invest and become a stakeholder,â€ť he says.
However, Dhirendra cautions that for the benefits of equity markets to overcome the risk quotient, investors must adopt a long-term perspective. â€śAn example is how Sensex dropped by 500 points when news broke of the Indian army conducting surgical strikes on terror across the LOC. Equities take time to appreciate, and investors need to keep that in mind,â€ť he says.