The biggest issue in the Indian stock market today is not whether the markets will go up or down, not whether you should buy growth or value stocks, not what sectors you should invest in. The main task of all the players in the market is how to convince the man on the street to entrust a portion of his savings to the stock market.
It’s about curing him of his fear of equities and about telling him that he’ll benefit if he keeps a portion of his portfolio in stocks.
At first glance, the latest RBI data on the financial savings of the household sector shows a rise in the amount of money that people are keeping in stocks and bonds. According to the RBI annual report, in 2006-07, households kept 6.3% of their savings in stocks and debentures, an increase from the 4.9% kept in these instruments a year ago. It’s also a huge jump from the 1.1% of savings kept by households in shares and debentures in 2004-05.
It does appear that the bull run in the past few years has slowly, but surely enticed people back into the market. Investments by households in stocks and bonds made up 1.2% of gross domestic product (GDP) in 2006-07, compared with 0.8% in the previous year.
But the big jump in savings was not in equities and bonds, but in bank deposits. Households stashed as much as 55.6% of their financial savings in bank deposits as interest rates rose last fiscal, compared with 46.2% in the previous year. This rush to bank deposits was at the expense of investments in government small savings schemes, where the rates of interest were no longer as attractive as those offered by banks.
Households also invested indirectly in the stock markets through the ULIP (unit-linked insurance plan) schemes of life insurance companies. The percentage of household savings flowing into life insurance companies increased from 13.4% in 2005-06 to 15% in 2006-07 and the bulk of the increase would have been in the ULIP schemes.
Almost all of the increase in the stock and bond holdings of households (apart from ULIP schemes) has been through mutual funds (MFs), which now account for 4.8% of household savings compared with 3.6% a year earlier.
However, most of the rise in MF collections did not flow to the equities market. Data from market regulator Securities and Exchange Board of India (SEBI) shows that while MFs mobilized a net Rs93,985 crore in 2006-07, well above the Rs52,779 crore mobilized in the previous year, most of the money went into debt schemes. Income and debt schemes saw their net mobilization of funds rise fourfold to Rs64,068 crore in 2006-07. In contrast, net accretions to growth and equity schemes (including tax-savings schemes) actually fell, from Rs35,231 crore in 2005-06 to Rs28,206 crore. The SEBI data refers to collections from all sources, not just households. But if the overall trend in MF collections is mirrored in the preferences of households, equities have still not been a big hit with the Indian investor, in spite of years of eye-popping returns. The preference for debt schemes and for the indirect ULIP route, together with the sharp rise in the proportion of money invested in bank fixed deposits, are a powerful indication of the risk-averse nature of the average Indian household.
Household investment in stocks and bonds is now reaching the levels seen in 1999-2000, at the height of the tech boom, when they reached 6.7% of financial savings.
It’s worth noting, however, that although households put a larger proportion of their financial savings into stocks and bonds in 1999-2000 than in 2006-07, they still made up just 0.8% of GDP in 1999-2000, compared with 1.2% now. That’s because of two reasons. One, the proportion of financial savings in total savings is also growing. And two, household savings are growing as a proportion of total savings in the economy. Financial savings of households constituted 18.4% of total savings in 2006-07, compared with 12.1% at the turn of the century.
It’s because of these statistical factors that the improvement in the amount of funds going into stocks and bonds is being understated. For instance, the amount of household savings flowing into stocks and bonds has gone up from Rs4,967 crore in 2004-05 to Rs47,918 crore in 2006-07, an almost 10fold rise in two years.
But it’s also a fact that in 1991-92, during the Harshad Mehta boom in the stock markets, savings in stocks and bonds was a staggering 23.3% of total household financial savings, and 2.6% of GDP. In that year, the bulk of the savings was invested through the Unit Trust of India or UTI (13.3%) and through direct investment in stocks and bonds (6%). Those were the first heady days of liberalization and investors rushed in droves to take advantage of the equity boom. Unfortunately, a series of scams and market crashes ensured a downhill journey since then and it is only in the last couple of years that there has been a revival of interest in equities.
The irony is that in spite of the vast improvements in the functioning of the stock markets, which now has rolling settlements, dematerialization of securities, a proper margining and surveillance system, and an efficient regulator, most Indian households have not participated in the huge bull run of the last four years.
Even in 1986-87, well before the liberalization of the stock markets, equities and bonds, including units of UTI, accounted for 8.5% of the total financial savings of households, a higher proportion than today’s.
Mint’s resident market expert Manas Chakravarty looks at trends and issues related to investing in general and Indian bourses in particular. Your comments are welcome at email@example.com.