Interestingly, if you compare the asset mix of the average Indian household, the equity exposure has steadily reduced since the financial crisis of 2008. The chart below captures the current mix of household assets.
As can be seen from above CLSA asset mix chart, equities as a percentage of total household assets are still quite low at 4.6%. This is a mix of direct exposure to equities and an indirect exposure to equity mutual funds. This was as high as 5% in 2008 post which it has been steadily falling. However, there are some positive signals that the trend in the last few years has been positive as can be seen from the chart below.
How the mix is steadily improving
As can be seen from the above chart, the share of equities in the average household mix has been steadily increasing after touching a low of just 2% in 2014. This can be largely attributed to the interest in equity funds from retail investors. Sample the following numbers. Since 2014, the equity funds have been seeing positive fund flows in almost all the months. The AUM of equity funds that was around Rs.8 trillion in 2009 has grown to nearly Rs.24.5 trillion in 2019. The number of systematic investment plans (SIPs) are in excess of 2 crore in India and the average monthly collection through SIPs are to the tune of Rs.8000 crore. All these point to a significant shift towards equities, albeit indirectly.
Invest in Mutual Funds Today
Why is the investment allocation so low to equities?
One of the principal questions that arise is why is the allocation to equities so low in a country like India? There could be the following reasons for the same.
- Indian investors have been traditionally invested in mid cap and small cap shares. Many of these stocks have been extremely volatile in the last few years and despite bouts of outperformance, they have tended to vastly underperform the markets in specified periods of time. For example, mid caps and small caps gave negative returns in 2018 at a time when large caps actually outperformed the markets.
- A series of scams have dented investor confidence quite a bit in the last few years. It began with the 1992 scam and was followed by the Ketan Parekh scam in 2000. In both cases, when the scam unravelled the price damage was so huge that it led to loss of confidence in equities. Similarly, in 2008 after the Lehman crisis the price damage to stocks in the realty and infrastructure was huge and losses were humongous. That explains why equity investments faltered badly after the crisis.
- What has happened in the last few years has been a shift towards equity mutual funds as an investment vehicle has emerged quite strongly. That is the right approach as in most economies it is the mutual funds that have been the preferred mode for accessing the equity markets. In fact, mutual funds offer a diversified method of participating in the equity markets.
- For a long time, Indians earned attractive returns through bank deposits, PPFs and real estate investments. Hence, households had little incentive to invest in equities. That is gradually changing post demonetization. We expect this shift to improve the allocation to equities further. Of course, equity funds will continue to be the preferred route and that is how it should be.