Bank accounts, deposits form bulk of financial assets among Indians: Morningstar study | The Financial Express

Bank accounts, deposits form bulk of financial assets among Indians: Morningstar study

Indian investors have a propensity for non-financial, real assets such as gold and real estate; insurance products such as annuities and endowment funds are also common, said the study.

Bank accounts, deposits form bulk of financial assets among Indians: Morningstar study
Less than 10% of households rely on financial assets for retirement.

The majority of the financial assets of Indians are in bank accounts and deposits, as many investors have traditionally preferred low-risk, steady-interest options, and only 7% of assets are in mutual funds, said Morningstar’s Global Investor Portfolio Study 2022.

Indian investors have a propensity for non-financial, real assets such as gold and real estate; insurance products such as annuities and endowment funds are also common, said the study. Gold is usually bought in the physical form, accumulated during a lifetime and used for inter-generational wealth transfer.

Real estate is another popular investment avenue as most Indians aspire to own a house, and many also invest in properties for capital appreciation and income-generation. An influential study put the share of real estate (including buildings and land) in Indians’ total net worth at 77%, and a high share of this wealth is in home equity as Indian households tend to aggressively pay off their mortgages.

Also Read: Funding winter: IFSCA aims to hand out Fintech grants to Indian innovators from early next year

While mutual fund assets have seen a significant growth in the past decade, only 7% of assets are in the segment, the study said. The Indian fund market is well-regulated and perhaps safer for retail investors than alternative ways of taking risk. Although the allocation to mutual funds remains small, investors have expressed a significant preference toward equities as India has a relatively attractive capital gains tax for equities, which provides a great incentive for individuals to invest.

“In both the markets (China and India), the comparatively modest social security net and lesser familiarity to investing are likely to explain the higher level of cash and deposits. That said, the assets that are invested in risk-bearing financial securities are often put into higher-risk products with high return expectations. Allocation funds are generally more equity-heavy in these markets,” said Kaustubh Belapurkar, director, manager research – India, Morningstar.

Middle-class and mass-affluent individuals cannot rely on social security but need to build wealth to finance life goals, highlighting the need for advice and adoption of a total portfolio approach, the study said. As per the household finance report by the Reserve Bank of India, more than half of Indian households currently depend on their children for financial support during retirement.

Less than 10% of households rely on financial assets for retirement. In recent years, a move to a more defined-contribution-focused pension system is underway with the launch of the National Pension System. Financial literacy is still relatively low, but the regulator and fund industry have been making huge strides in imparting investor education.

Given the inability for local investors to invest offshore, home bias is close to 100% in India. Foreign assets can either be bought by sending money to an overseas account through the Liberalised Remittance Scheme, with a cap of $250,000 per person per year.

In addition, the regulator allows domestically domiciled funds to invest directly in foreign securities or in foreign feeder funds, but there is an overall cap for the industry at $7 billion. This limit is currently close to being breached, and thus many funds are closed for fresh subscriptions. These factors limit the scope to diversify into global securities.

Get live Share Market updates and latest India News and business news on Financial Express. Download Financial Express App for latest business news.

First published on: 09-11-2022 at 02:55 IST