There has been a welcome shift in the composition of household savings in the financial year of 2014-15. Individuals are investing in financial assets again, after a five-year period when the favoured inflation hedges were physical assets such as gold and real estate. The RBI's latest Annual Report says that the financial savings of Indian households rose to about 7.5 per cent of national income in 2014-15 from 7.3 per cent in 2013-14. At the same time, real estate and gold are both believed to have declined as a percentage of household savings. This shift may have been induced by the reduction of retail inflation, which dropped from earlier double-digit levels to an average of 5.9 per cent last financial year. Lower inflation allows households to generate higher surpluses. Since gold has dipped in value and real estate is also downbeat, the focus may have returned to financial assets.
Yet, although real interest rates turned positive in 2014-15, bank deposit growth was modest. The big gains came in the stock market. The Sensex rose by 27 per cent and many actively managed equity schemes yielded even higher returns than the benchmark index. That combination - falling inflation, high stock market returns, and falling gold and real estate prices - seems to have rekindled Indians' risk appetite. There has been a very significant expansion of household assets invested with the mutual fund industry. The Association of Mutual Funds of India or AMFI says that average assets under management (AUM) grew by a whopping 29 per cent between August 2014 and August 2015. Individual investors now own about 46 per cent of AUM up from 44 per cent a year ago. As much as 84 per cent of the AUM in equity-oriented schemes is owned by individuals, who have parked 59 per cent of their overall mutual fund exposures in equity. Over 1.5 million new individual investment folios were created last year. Fresh mutual fund mobilisation in 2014-15 rose to over Rs 1 lakh crore, nearly double the Rs 53,000 crore of fresh mobilisation registered in 2013-14. This expansion is evident in the new-found aggression of domestic institutional investors. In 2015 so far, domestic institutions made net equity investments of Rs 50,824 crore, whereas they sold a net Rs 31,344 crore in the same period of 2014.
It remains to be seen if this shift in allocations is due to a genuine change in the mindset of individual investors, or it is a temporary response to dips in the value of real estate and gold. Households generate about 70 per cent of all domestic savings. It is a great pity that the bulk of those savings are locked into unproductive physical assets rather than being deployed in growth-generating avenues. It is no accident that the highest growth rates were recorded between 2005 and 2009 when households consistently parked over 10 per cent of gross domestic product or GDP in financial assets. Returning to those levels would enable faster GDP growth, while easing pressure on the current account by reducing gold imports. Hopefully households will become more capable of ignoring short-term volatility. This is only possible when there is widespread confidence in a transparent and equitable regulatory framework, and also faith in the economy's growth potential.