You are here: Home » Markets » Mutual Funds
Business Standard

Capital shifting towards financial assets

Record inflow to equity funds but opinion is divided on whether this preference is temporary

Ishan Kumar Bakshi  |  New Delhi 

Over the past 13 months, there has been a dramatic surge in capital flows into equity (MFs).

From May 2014 to May 2015, net inflows were Rs 91,800 crore, says a report from Deutsche Bank. This is almost equal to the cumulative net inflow into MFs over the past 12 years, from January 2002 to April 2014.

Economists attribute this sudden surge to three factors -- a moderation in inflation, fall in returns from physical assets such as gold and real estate, and a booming stock market.

According to D K Joshi, chief economist at CRISIL, the ratings agency: “When inflation falls, it is logical for people to shift in favour of financial assets.” Retail inflation had averaged nine per cent annually over the past few years. This eroded real returns from financial assets such as bank deposits. With inflation moderating over the past year, real returns from bank deposits and stock have turned positive.

Also, over the same period, returns from gold and real estate have plummeted. Gold has fallen from Rs 28,900 per 10g in March 2014 to Rs 26,800 this month. This has had a dampening effect on investment demand. The Deutsche Bank report says the share of coins and bars, the investment component of gold demand, within overall gold consumption was 21 per cent in the fourth quarter of 2014-15 from a peak of 44 per cent in the first quarter of 2013-14.

In contrast, the BSE exchange's benchmark Sensex grew 23 per cent over the period, providing superior returns. Thus, it is likely that those looking at physical assets as an investment option have shifted to equities in this period.

This shift has significant ramifications on the broader economy. Households in India account for 72.7 per cent of total gross domestic savings and are central to funding the investment cycle. Over the past few years, they allocated a greater proportion of their savings to physical assets. The proportion rose from 52.5 per cent in 2009-10 to 67.6 per cent in 2012-13. As a consequence, the share of financial savings fell from 47.5 per cent in 2009-10 to 32.4 per cent in 2012-13. This meant that funds which could have been utilised by companies got sucked out of the financial system.

This surge in inflows into equity MFs over the past 13 months suggests a shift in favour of financial assets is underway. The Deutsche Bank report says this surge indicates a “long-pending shift in the nature of Indian household savings from physical assets to financial assets”.

The question is whether this is temporary or signals a more lasting shift in favour of financial assets over physical assets. Madan Sabnavis, chief economist at CARE Ratings, cautions against reading too much into these flows. The shift, he says, “is within financial savings and not from physical assets to financial assets. It is probably the lack of alternative investment avenues that give positive real returns that seems to be driving this shift”.

With the stock market booming over the past 18 months, households have allocated a greater proportion of their savings into equities. Not only are returns from equity investments tax-free if held over a year but the higher returns have also shielded them against inflation.

However, the trend could easily reverse. If the recent weakness in the persists, the lower returns could drive the money out. Weak corporate results and the absence of any conclusive evidence suggesting a firm and broad-based recovery is underway could further temper expectations and drag down the This would lower the expectation of higher returns and trigger a reversal in capital flows. Sabnavis is, thus, sceptical about whether this recent trend will continue.

Dear Reader,

Business Standard has always strived hard to provide up-to-date information and commentary on developments that are of interest to you and have wider political and economic implications for the country and the world. Your encouragement and constant feedback on how to improve our offering have only made our resolve and commitment to these ideals stronger. Even during these difficult times arising out of Covid-19, we continue to remain committed to keeping you informed and updated with credible news, authoritative views and incisive commentary on topical issues of relevance.
We, however, have a request.

As we battle the economic impact of the pandemic, we need your support even more, so that we can continue to offer you more quality content. Our subscription model has seen an encouraging response from many of you, who have subscribed to our online content. More subscription to our online content can only help us achieve the goals of offering you even better and more relevant content. We believe in free, fair and credible journalism. Your support through more subscriptions can help us practise the journalism to which we are committed.

Support quality journalism and subscribe to Business Standard.

Digital Editor

First Published: Wed, June 24 2015. 22:49 IST