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What Indians are investing in? - Views on News from Equitymaster
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  • Sep 29, 2006

    What Indians are investing in?

    Looking at the fascination of the pink papers about them, your guess may be 'equities'! High proportion of disposable income, contained inflation and benign interest rates has facilitated Indians to grow their savings over the last couple of years. This is well reflected in the rise in the savings to GDP ratio (29% in FY06), which has expanded by nearly 500 basis points in the last decade. While the risk profile of Indian households has been traditionally low, the rally in stock markets and real estate has often caught their fancy. The latter is more justified given the fiscal incentive to it.

    A review of the investment pattern of the Indian population, based on the statistics reckoned by the Reserve Bank of India (RBI), however, clearly shows that there has been little change in the broader portfolio allocation. Despite the Sensex having multiplied 4 times in the last decade, the allocation to equities has merely grown from 4.5% of total household assets to 5% in the same period. It is also interesting to note that the same was 3.3% four decades back. This shows that the 'spiraling Sensex' has yet to catch the fancy of many. One may also attribute the cause of this to investor ignorance and anxiety about investment in equities. The risk averseness is also evident from the fact that Bank FDs (47%) and tax saving schemes like the PPF (10%) continue to enjoy a higher allocation in the Indian investors' portfolio.

    The household sector balance sheet...
    Assets Liabilities Liabilities /
    (Rs bn) Bank deposits PPF Insurance Shares Others Total Bank advances Other loans Total Assets (x)
    FY71 8 5 2 1 6 21 5 1 6 0.28
    FY76 21 12 4 0 13 51 9 2 11 0.21
    FY81 56 21 9 4 31 121 31 4 35 0.29
    FY86 106 42 14 14 80 256 60 9 70 0.27
    FY91 188 112 6 50 235 589 74 18 93 0.16
    FY96 399 223 139 88 393 1,243 156 30 186 0.15
    FY01 947 479 339 111 608 2,484 254 63 318 0.13
    FY06 2,746 586 833 295 1,426 5,887 1,750 75 1,825 0.31
    Source: RBI Handbook of statistics 2006

    Looking at the other side of the coin, the above data also points out to the fact that the interest in equity investments has more than doubled in the last decade and has also prompted Indians to borrow more, bringing the leverage ratio to an all-time high. While this is certainly a sign of economic maturity and alignment to the developed markets, what needs to be kept in mind is that equity investments should not be allowed to become 'fair-weather friends'!

    Conducive market conditions have the ability to mask a poor investment decision or even make it seem like a good one. But the fact remains, that a wrong investment stays that way. Sure, investors could well clock attractive returns, but then that is a factor of the rising markets, not something that the investment should be credited for. Over a longer time frame, when the markets witness a cycle (upswing and downturn), a poor investment inevitably stands exposed. While statistics reveal that equity as an asset class outperforms all other asset classes over the longer term, the investor needs to ask himself / herself a few questions:

    Whether you have an investment plan? Not having an investment plan and a well-defined investment objective in place is almost a certain way to ensure that you will encounter negative surprises in your portfolio. Without a detailed investment plan, your investments are as unambiguous as they can get. It is thus, necessary to avoid being a victim of 'financial myopia'.

    Whether you are saddled with an incompetent advisor? With more investment options routinely being made available to investors, the onus to study and assess the feasibility of these options has passed onto the advisor. However, here investors in equities particularly need to make sure that the 'advice' is well researched and with a long-term perspective.

    Whether your investments are lop-sided? If the investment portfolio is lop-sided in favour of a single asset class like equity, it may not be in line with your risk profile and defeat your investment objectives. A balanced portfolio offers you the benefit of diversification.

    Whether you lack discipline? Broadly speaking, discipline is the cornerstone that will determine whether or not you achieve your financial goals. By discipline, we mean the perseverance to stay invested for a longer term, rather than betting on short term.

    To sum up, Indians are not over-invested in equities for sure! This, however, offers them a very feasible investment opportunity, if done with the correct perspectives. Fortunately for investors, rising markets offer the opportunity to exit the wrong investments, that too at a profit. Instead of becoming greedy and taking on higher risk by investing in ill-advised investment avenues, now is the time to conduct a thorough review of your portfolio. Don't get carried away by rising markets, instead, use them to your advantage!



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