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Indians: Still risk averse

Aug 8, 2003

Indians have been known for their saving prowess and this was one of the salient features of the 1990's, which saw a rise in household sector savings as a percentage of GDP. In this, the percentage of savings held in financial assets also increased steadily. Increase came mainly from bank deposits and Life insurance products. This increase can be attributed to increased number of new offerings in case of financial instruments. Though savings in shares and debentures witnessed an increase during FY82- FY96 period, it declined post that period. Let us analyse some of the key reasons, which drove the growth in the savings rate.

% of household financial savings
Item of saving FY82-FY86 FY87-FY91 FY92-FY96 FY97-FY01
Currency 15% 16% 13% 10%
Bank deposits 31% 23% 31% 36%
Shares & debentures 7% 12% 17% 5%
Small savings instruments 15% 15% 8% 13%
Insurance products 9% 10% 11% 13%
Provident & pension funds 23% 24% 20% 24%
Source: RBI

Bank deposits continued to be the most preferred savings instrument as indicated by the table. Investors tend to be more cautious and as a result of this, they want to invest in less risky instruments. Consequently, banks continued to be the top instrument for saving. New instruments launched also increased savings in this front.

Relatively safer instruments like life insurance, provident and pension funds (together called as contractual savings) also formed a significant part of savings during this period. This increase is a long term positive as these funds are based on long term contracts. These funds offer assured returns and tax exemptions and are considered to be of great help during the later part of a persons life. The benefits are not only limited for an individual but is also important considering that the gestation period is longer. The funds mobilised by these schemes can be used in developmental activities.

Savings in shares and debentures increased during FY82-FY96. However, post this, it witnessed a decline and during FY01, savings in this segment reached their lowest levels. Reforms undertaken by capital markets meant to increase investments in this front were successful to some extent. However, continued irregularity in the stock markets (Scam in 1992 and the recent one in 2001) led to increased nervousness and funds were once again diverted towards safer instruments.

Need for regulator to check such irregularities became more important. SEBI has become more vibrant in this front and has taken steps in right direction. A proper check by a regulator will help bring back investor confidence and will lead to increased proportion of household financial savings to be channelised in to shares and debentures. Mutual funds are also increasingly paying an important role in diverting household savings towards the stock markets. Though equity markets offer higher growth potential, they pose certain risks and an investor must understand his risk profile well before investing in the same. Proactiveness and discipline is the key to investing in the stock markets.

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