While household savings have dipped from a high of 25.2% of GDP in FY10 to 21.9% in FY13, using the old GDP series, due to the collapse in the economy, what was even more problematic was what happened in terms of how this saving was divided between physical and financial assets. Physical savings comprised around 52-53% of all household savings in the 2000s, but this surged to 69% in FY12 and fell marginally to 68% in FY13. In other words, there was a double-whammy as far as the funds available for investors from the household sector was concerned. It may be early days, but there seems to be a turnaround in the households’ attraction for physical assets like gold and property. In the case of gold, with the global economy stabilising and gold prices collapsing—from $1,826 per troy ounce in 2011 to $1,190 currently—gold demand began reducing dramatically; while demand for gold was $14.1 billion in April-June quarter of 2013, it fell to $7.5 billion in Jan-March quarter 2015.
Even more dramatic has been what has happened to household investments in equity markets through the mutual fund route. In the last 12 months, thanks partly to the 24% hike in the Sensex, there has been a surge in mutual fund inflows. At R91,800 crore from May 2014 to May 2015, the net inflows into equity mutual funds is around 0.6% of the year’s GDP. Put another way, as Deutsche Bank points out, inflows into equity mutual funds in the last 13 months has been equal to what mutual funds received in the last 12 years! Call it the Modi effect if you will, but there has been a dramatic change in the way households are looking at savings. According to Deutsche, the demand for coins and bars—roughly seen as the amount households are buying by way of pure investment as compared to jewellery—has fallen from a peak of 44% of all gold purchased in Q1FY14 to 21% in Q4FY15.
Though many in the government believe households are simply hoarding gold because they like it, the collapse in gold demand—and the increase in equity investments through mutual funds—are all related to returns, as indeed they should be. Over a 1-year horizon, for instance, the best equity fund has given a 55% return—the category average for mid- and small-caps has been 27%—as compared to 6% in the case of real estate, 9% in the case of liquid debt funds, 13% for income debt funds and 8.7% for fixed deposits in banks; gold delivered a negative return of 7%. Over a 5-year time frame, real estate has appreciated 70%, fixed deposits 52% and gold 40% as compared to 182% for the best mid- and small-cap fund—category average 121%—and 60% in the case of debt funds. Equity funds, it is true, still comprise just 23% of the total assets under management of mutual funds, but this was 19% a year ago. The flip-side of this, of course, is that with Indian households having matured in the manner they have, if the markets collapse over a period of time—if the government doesn’t do enough to get growth back on track—the money can move out just as quickly.