Highest equity allocations come in a disappointing year for indices

Broader market gave negative returns despite allocations touching record levels since 1970-71

The biggest-ever allocation to financial savings since at least 1970-71 has come in a less-than-spectacular year for equity returns.

The Reserve Bank of India’s data on changes in financial savings for 2017-18 (FY18) shows that total allocation to shares and debentures (under which equities are classified) was up by Rs 1.51 trillion. This is the biggest single-year change since at least 1970-71. The previous biggest such allocation was Rs 74,308 crore in 2007-08. The year 2008-09 saw markets crashing after the global financial crises hit India.

Numbers for the current financial year (FY19) show that equity returns have been lower than previous years. The Sensex is up 11.12 per cent, which is lower than the previous two years. However, there is also pain in the broader market. The BSE MidCap Index fell 6.87 per cent. The BSE SmallCap Index was down with -14.34 per cent returns.

Comparatively safer fixed deposits at the beginning of the financial year gave returns of 6.4 per cent (based on State Bank of India rates).

Bhavesh Sanghvi, chief executive officer of Emkay Wealth Management, said investors may do a re-think on their allocations if returns are weak.

“I don’t think we’ve seen a massive redemption, but if things continue to be in a bad shape, then these flows will recede. They will start moving into either fixed deposits or real estate,” he said. 

The lacklustre returns come even as allocations away from physical assets had begun to pick up after a long-standing preference for financial savings.

The Reserve Bank of India’s Committee on Household Finance noted that Indian households don’t invest as much in financial assets as those in developed countries. There is also no reduction in physical assets after they pass their retirement age. This is different from countries such as China, the United Kingdom, Germany and Australia.

“As they become richer, households trade off gold holdings for real estate. They do not increase their wealth allocation to either financial assets or retirement accounts,” said the August 2017 report.

Net financial savings at current prices (with base year 2011-12) was Rs 11.3 trillion. This includes bank deposits, deposits in non-bank institutions, life insurance funds, and provident and pension funds, among others.

Shares and debentures accounted for 8.03 per cent of the changes in financial assets. Bank deposits came in at 25.27 per cent. Currency was another 25 per cent.

Physical savings are still higher at Rs 17.68 trillion. This includes real estate and other such assets. Allocation to gold and silver was Rs 41,257 crore. This is lower than the Rs 46,257 crore in the previous year. Gold has given returns of 4.74 per cent so far in the current financial year.

Nicholas Holt, head of research at global property consultancy Knight Frank Asia Pacific, said that more financial assets may yet be on the agenda in the near term. Short-term triggers are more likely to play a role in allocations, according to him.  

“Which way the election goes later in the year, and what manifestos and policies could be implemented afterwards, could also impact the way allocations are made following that,” he said.