Retail investors also warmed up to investments in stocks and bonds as per the latest figures on household savings.
The Reserve Bank of India's Annual Report showed that household financial savings grew by 15% to Rs 10.97 lakh crore, which is 7.7% of the gross domestic product (GDP) against 7.5% of GDP in 2011-12.
Indian households invested an additional Rs 34,400 crore in shares and debentures during 2012-13 against Rs 4,500 crore in such investments in 2011-12.
The share of capital market investments in households total financial investment has, as a result, gone up to 3.1% from below 1%.
In 2012-13, the Sensex swung between 16,000-20,000 on an average and the returns from the index stood at 8%.
Much of these investments were routed through mutual funds. Out of the Rs 34,400 crore invested in shares and debentures, households invested Rs 27,400 crore through mutual fund schemes.
Equity schemes of mutual funds paid a return of 8% on an average while debt schemes had a return of 9-11%, according to Value Research.
The rise in purchase of shares and bonds comes even as high retail inflation was thought to be driving investors towards physical assets like gold and real estate. Shares gave a return of around 8% while the return from gold was just 4.8%.
In fact, investments into gold and other valuables fell to 2% of the GDP from 2.4%. Some analysts attributed this fall to the government's announcement of duty hikes on the yellow metal during 2012-13.
The outcry of policymakers over the rising gold imports and the measures to curb the same seem to have dented demand, albeit modestly.
Overall, financial investments are still dominated by bank deposits and more than half of it finds its way into them.
However, households kept a 56% of their financial savings in deposits during 2012-13, lower than 57% the previous year as deposit rates didn't even cover for the loss of value due to high inflation.
Indians borrowed more during 2012-13, perhaps emboldened by the falling interest-rate regime and the wide expectations that rates are headed south.
During 2012-13, the RBI had slashed the key policy rate by 100 basis points and most banks had lowered their lending rates by a similar margin either through cut in base rates or through reducing the spread over the base rate at which loans were given.
Financial liabilities of households went up, driven by both personal loans and mortgages, the RBI report says. Part of these liabilities may have been channeled to create physical assets, the report said.
Indeed, growth in banks' retail credit picked up by upto 14.3% in 2012-13 from 12.9% in the previous year even as wholesale credit growth slowed to 15.7% from 20%, Reserve Banks data shows. Retail loan growth was led mainly by home loans.