Savings flowing into equity: Not a pandemic blip but a basic shift

Despite the strides made in the past four years, only about 6.5% of Indians invest in equity markets.
Despite the strides made in the past four years, only about 6.5% of Indians invest in equity markets.

Summary

  • Call it the equitization of Indian savings. With India's stock market capitalization in the $5 trillion plus club, more and more people will invest in stock markets as India’s middle class expands, incomes rise and youth bulge adopts mutual funds. Share ownership is rising fast.

Over the past four years, we have been amazed by the notable increase in the number of demat accounts, SIP investment flows, mutual fund (MF) investor count and similar data. The number of unique investors in Indian equity markets has nearly tripled since 2020 to 90 million. Equally impressive, the number of investors in mutual funds (unique PAN holders) has more than doubled from 21 million as of December 2020 to 45 million as of April 2024.

(graphic:mint)
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(graphic:mint)

We are witnessing an extension of the financialization of savings—what I call as the ‘equitization of investments.’ This trend, which refers to the increasing preference for equity investments over traditional savings, is poised to reshape the financial landscape of the country.

This shift is being fuelled by three interconnected mega trends: An expansion of the middle class, rising incomes within this demographic and the youthful profile of India’s population. Trust and financial literacy are reinforcing this trend, although the inherent volatility of equity markets will lead to fluctuations in this equitization trend.

Also read: Explained: What's driving increased retail participation in Indian stock market?

Growth of the middle class: As per a report by People’s Research on India’s Consumer Economy (PRICE), India’s middle class is set to nearly double its share of total population by 2047 from an estimated 31% of our headcount in 2020-21 to a projected 61%. In absolute terms, the class is expected to grow from 432 million individuals in 2020-21 to about 715 million by 2031 and over a billion by 2047. Our fast-rising middle class is a critical driver of equitization, given its high capacity for investing assured by relative financial stability.

Rising income levels: As per a report by HR consulting firm AON, annual salary increases in India have ranged between 9.3% and 10.5% during 2013-2023, except in covid-impacted 2021. It is fair to assume that we would see robust wage increases over the next decade lifting the disposable incomes of the middle class.

This money is often channelled into investments. Given the relatively low returns on traditional savings avenues like fixed deposits, equities present an attractive alternative with the promise of higher returns, albeit at higher risks.

Young demographics: As per a CAMS report in 2023, India added 15.7 million new mutual fund investors between 2019 and 2023. A whopping 54% of these investors were millennials (born between 1981 and 1996). In 2023, almost 90% of their investments were in equity MFs.

Almost 66% of these millennials (5.1 million in total) opted for the SIP route to make their first investment, indicating an intent to keep equity as an important asset class in their portfolio. They have a good 20-30 years of earning and saving ahead of them. We expect this group to have only started investing with small amounts and significantly increase equity allocation as their familiarity with this asset class and confidence in it grows.

Also read: Individual investors' share in mutual fund AUM surges 44% in a year; equity schemes find more takers, shows AMFI data

Trust and financial literacy are factors that could lend the trend support.

Trust: Trust is fundamental to stock market participation, with several studies highlighting how the confidence of investors in market fairness, regulatory effectiveness and the reliability of financial information influences their risk perceptions and willingness to invest. Trust has been gradually built through improved regulations and better governance, apart from the success of our financial markets.

Corporates, regulators and intermediaries such as accountants, brokers, advisors and institutional fund managers play crucial roles in fostering investor trust and ensuring market integrity. As per the CFA Institute’s Trust Survey conducted in 2022, India has the highest trust level among 15 markets globally. About 83% of retail participants from India said they trusted financial services, compared to 64% in the US, 45% in Australia and 37% in Germany (the lowest ranked).

Financial literacy: This is a pivotal factor. Brokers, advisors and other professionals need to guide investors, particularly novices, on how to mitigate risks associated with market fluctuations. They must recommend effective strategies, such as asset diversification, selecting stocks from high-quality companies, entrusting money to professional fund managers and maintaining a long-term perspective to withstand volatility and achieve potential growth.

By educating investors on these approaches, intermediaries not only enhance individual investor portfolios but also foster greater confidence and participation in financial markets.

Also read: Mutual Funds: Is now the right time to invest in aggressive hybrid funds?

There’s a long way to go: Despite the strides made in the past four years, only about 6.5% of Indians invest in equity markets. The corresponding count is significantly higher in other developing and developed economies. Overall investments in MFs and equity still remain low as a proportion of overall financial assets held.

Befriend the trend: I am not suggesting that this mega trend will be smooth. Indeed, it will experience fluctuations influenced by historical and projected returns from various asset classes like equity, real estate and debt. Changes in taxation could also impact it. However, the broader growth in equity participation by Indian investors is likely to sustain over the next decade, if not longer. As India continues to evolve, the move towards equity is not just a pandemic blip but a fundamental shift that is likely to endure.

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