Risk appetite: How Indians are diversifying their savings portfolios

Indian households have traditionally relied heavily on physical assets and bank deposits as the cornerstone of their financial planning. However, a noticeable shift is underway — households are increasingly channelling their savings into mutual funds, insurance products, and pension schemes, seeking returns higher than those offered by banks. Net household financial savings in India rose from 7.7 per cent of gross domestic product (GDP) in 2019-20 to 11.7 per cent in 2020-21, largely because of precautionary and forced savings during the pandemic, but moderated thereafter to a multi-decade low of 5.3 per cent in 2022-23. A recent study in this regard by economists at the Reserve Bank of India (RBI), which examined household portfolios, indicated how household behaviour was changing. While bank deposits, including fixed deposits and post-office savings, are still the most preferred savings instrument among households, market-linked ones are gaining traction. The study reveals that households’ increasing propensity to invest in diverse financial instruments is being driven by rising income levels, increased financial literacy, the proliferation of smartphones and internet connectivity, and the ease of investment facilitated by digital platforms. 

Second, there is considerable heterogeneity between rural and urban households in terms of risk appetite. Expectedly, urban households display a greater inclination to adapt their investment choices to dynamic economic conditions, whereas rural households are relatively conservative. Income certainty also influences households’ composition of financial portfolios. Salaried workers and the entrepreneurial class display a higher tendency to invest in riskier assets across both rural and urban areas. Bank deposits’ waning dominance, while reflective of growing financial literacy and awareness of diversified investment options, has raised concerns within the RBI and the broader financial ecosystem. Negative to low real returns during the pandemic period seem to have affected bank deposits. The share of low-cost current and savings accounts in total deposits has declined the past few years from a peak of 44-45 per cent in recent years to 38-39 per cent. In contrast, mutual funds, especially equity and hybrid schemes, have seen a surge in inflows and have delivered higher returns over the past few years. The share of mutual funds constituted around 6.1 per cent of household savings in 2022-23, with the number of mutual-fund folios jumping from 146 million at the end of 2022-23 to 178 million at the end of 2023-24. 

The decline in bank-deposit growth, juxtaposed with robust credit demand, created a liquidity mismatch for banks. In response, banks turned to instruments that are more sensitive to interest-rate fluctuations and market volatility. This strategy, while addressing immediate liquidity needs, poses risks to banking-sector stability. At the same time, riskier financial assets, while offering higher returns, expose household finances to greater uncertainty. Overall, the changing investment behaviour of Indian households can create challenges for the banking system in mobilising low-cost deposits and may affect their margins over the medium term. However, on the other hand, increased availability of risk capital can bring the cost of capital down for corporations and incentivise investment. From the regulatory standpoint, it will be important that investment in capital markets is well guarded and investors are made aware of the risks involved.