Investing Abroad: Home bias is close to 100% in India – Morningstar Global Investor Portfolio Study | The Financial Express

Investing Abroad: Home bias is close to 100% in India – Morningstar Global Investor Portfolio Study

Foreign assets can either be bought by sending money to an overseas account through the Liberalized Remittance Scheme, with a cap of USD 250,000 per person per year.

Investing Abroad: Home bias is close to 100% in India – Morningstar Global Investor Portfolio Study
Indian investors have a great propensity for nonfinancial, real assets such as gold and real estate.

India’s financial markets have gradually become more open, though the maintenance of capital controls has limited the number of asset classes and the scope for local investors to invest offshore. Morningstar in its recently launched Global Investor Portfolio Study says that given the inability for local investors to invest offshore, home bias is close to 100% in India.

The majority of the financial assets are in bank accounts and deposits, as many investors have traditionally preferred low-risk, steady-interest options. Insurance products such as annuities and endowment funds are also common.

Indian investors have a great propensity for nonfinancial, real assets such as gold and real estate. Indians are among the largest consumers of gold, both for investments and adornment. Gold is usually bought in the physical form, accumulated during a lifetime, and used for intergenerational wealth transfer. Real estate is another popular investment avenue; most Indians aspire to own a house, and many also invest in properties for capital appreciation and income generation.

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Within the exposure to financial assets, a large portion of assets are in insurance products such as annuities and endowment plans, which are commonly seen in investors’ portfolios, and only 7% of assets are in mutual funds. While mutual fund assets have seen significant growth in the past decade, they remain underpenetrated overall.

The Indian fund market is well regulated and thus 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. Portfolio advice is not yet as prevalent, as the bulk of financial assets sits in cash and local investors generally prefer to build wealth via nonfinancial assets such as real estate and gold. Middle-class/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.

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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 Liberalized Remittance Scheme, with a cap of USD 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 USD 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.

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First published on: 05-11-2022 at 08:45 IST