Home >Opinion >Views >Opinion | A money mantra for middle income India

Nobody cuts a giant chocolate cake to the sound of drumbeats when the Bombay Stock Exchange Sensex drops over a thousand points in less than a week. That’s what people did near the big bull at the bourse’s building in Mumbai when the broad market index hit 40,000 just a few months ago. Today, the Indian equity market is hurting on both domestic slowdown and global meltdown issues, and retail investors who’re in for the long haul through mutual funds are beginning to worry about how long that haul actually is. This fear is beginning to show in inflows through systematic investment plans (SIPs), which showed a tiny decline in August 2019, bucking a smoothly rising trend. One reason that has kept SIPs going despite a choppy market since early July is that households have nowhere else to take their money. The country’s enormous real estate bubble burst around 2014-15, and the sector is yet to recover. Household money has been stuck in incomplete projects that are now in litigation and people are paying both equated monthly instalments and rent without much hope of resolution in the near future. Housing prices, after accounting for inflation over a seven-year period, are down between 20% and 50% in India’s large over-bought metros. Investments in life insurance are a very expensive way to hold government securities that turn an 8% return into 3-4%. Fixed deposits (FDs) are safe, but two decades of a financial literacy push have told educated middle-class Indians that FDs don’t do so well on keeping their post-tax purchasing power intact. Now that middle-agers have replaced the fear of dying too soon with that of living till 100, they accept that FDs may not be the best vehicle for a future where they might be forced to be unpaid babysitters for their kids’ kids.

Indian urban middle-class households are confused about what to do with their money. Global reports talk of investment mavens being in “risk off" mode. Should they do likewise? Sell their equity portfolio and seek the safety of either gold or guaranteed fixed-income products? Financial experts are united in their advice that retail investors should never chase last year’s winners or time markets. What works best is a portfolio approach, by which money is allocated to lower risk products such as top-rated bonds, inflation hedges like gold, and wealth creators such as equity. They also advise an insurance cover for emergencies so that money is freed up for long-range investment. Retail investors should stick to a plan if they have one, and build one if they are still taking spasmodic investment decisions. Having a plan that they understand prevents them from rushing out of equity when markets fall. Indian equity is well poised over the long term because economic growth will continue, even if at a lower trajectory. Middle India should avoid being tempted by high-risk propositions such as ponzi schemes and crypto currencies, and stick to a sensible approach.

Some dodgy investments are habits. While these could take time to change, the government could help by finding a way to bring government securities (not through banks or insurance firms) to the people. This would satisfy a deep desire among our risk-averse middle-class for a product that assures its holders returns that beat inflation. A Pradhan Mantri Bachat Yojna to take government securities mass market could also raise the country’s sagging household savings rate.

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