Post-Covid: Households shift to equities amid attractive returns

This report has been updated

Households are shifting their investment more to equities, directly as well as through mutual funds (MFs), particularly after the pandemic, at the expense of deposits.

This trend is being amplified by strong returns in the equity markets in recent years, said Kotak Institutional Equities in a report.

The data compiled by the brokerage shows the allocation of household assets to equities, MFs, and portfolio management services/alternative investment funds has increased from 15 per cent in 2020 to 25 per cent in 2024.

“While there is (a) clear shift in allocation toward equities (direct and MFs) at the cost of deposits, it is magnified by strong returns in recent years,” the broking firm said in a report on Tuesday.

In contrast, cumulatively, allocation to bank deposits -- fixed deposits, savings account deposits, and current account deposits -- came down from 53 per cent in 2020 to 42 per cent in 2024. Allocation to fixed deposits has come down to 23 per cent in 2024 from 28 per cent during the same period. Similarly, there has been a decline in allocation towards savings accounts as well -- from 22 per cent in 2014 to 17 per cent in 2024.

Interestingly, the allocation of household assets to pension has gone up from 10 per cent in 2020 to 12 per cent in 2024 while that to insurance has dropped to 21 per cent in 2024 compared to 23 per cent in 2020.

“Saver turns investor in a rebalance of household financial assets. Bank deposits move from 53 per cent to 42 per cent between 2020 and 2024. Future is a holistic approach to financial services. Time for mindset change,” said Uday Kotak, founder and director, Kotak Mahindra Bank, in a post on social media platform “X”.

Assets under management (AUM) with MFs have trebled to Rs 45 million in the post-Covid period on the back of strong inflows and the appreciation in the value of assets, especially equity holdings.

The number of investors has more than doubled between March 2020 and March 2024 to 4.5 million. Experts say the interest in equity MFs in the post-Covid period is driven by the rally in the equity markets and the lack of other high-return yielding investment options.

Meanwhile, on several occasions, the Reserve Bank of India (RBI) had flagged the issue of alternative avenues of investment becoming more attractive for household savers, resulting in bank deposits growing at a sluggish pace in comparison to credit growth.

“…it is observed that alternative investment avenues are becoming more attractive to retail customers and banks are facing challenges on the funding front with bank deposits trailing loan growth,” RBI Governor Shaktikanta Das said during the August monetary policy review.

As a result, banks are taking greater recourse to short-term non-retail deposits and other liabilities to meet incremental credit demand, Das had said, adding that it might potentially expose the banking system to structural liquidity issues. Hence, banks should focus more on mobilising household financial savings through innovative products and service offers and by leveraging their branch network.

Banks are now offering higher interest rates on fixed deposits, insurance cover, enhancing customer engagements, to mobilise deposits.

Disclosure: Entities controlled by the Kotak family have a significant holding in Business Standard Pvt Ltd.