RBI’s 3 step guide to your personal finance; here’s how to manage gold, debt, retirement

RBI has three suggestions to the Indian households: chuck gold, plan your retirement corpus and finance your home with a mortgage.

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Demonetisation was mainly aimed to put a check on black money which was circulating in the economy. (IE)

RBI has three suggestions to the Indian households: chuck gold, plan your retirement corpus and finance your home with a mortgage. In its recent research report, RBI compares the Indian household saving trends with their international counterparts.  RBI says that the Indian investor allocates a dismal 5% of his entire portfolio to financial assets. A whopping 84% is invested in real estate and other physical assets, while 11% is invested in gold.

Elaborating on the benefits of moving away from gold, the apex institution says, “If households in the middle third of the gold holdings distribution re-allocated a quarter of their existing gold holdings to financial assets, the wealth gain in real present value terms accruing would be sufficient to move these households roughly 1 percentage up the current Indian wealth distribution.”

Secondly, RBI says that the population of the elderly in India is expected to grow by 75 percent over the next 15 years. “Only a small fraction of this cohort has saved in private pension plans. Moreover, a large segment of the population of households in all age cohorts has not actively taken steps to insure adequate financial coverage during retirement,” observes RBI.Underscoring the importance of saving for retirement RBI says, “The need to finance adequate consumption during retirement is therefore a looming issue, and when combined with the low penetration of insurance, households appear particularly vulnerable to adverse shocks later in life.”

 RBI says that  despite the high holdings of real estate, mortgage penetration is low early in life of households, and subsequently rises as they age.  According to the report, Indian households tend to borrow later in life and are more likely to reach retirement age with positive debt balances, which is a source of risk given that they are no longer earning income during these years.

Bringing out the striking differences between saving patterns in India and abroad the report says that households in advanced economies hold substantially more financial assets than their Indian counterparts, are much more likely to finance home purchasing with a mortgage, and allocate a sizeable fraction of their wealth to retirement savings over the course of their lifetime. According to the apex organisation, the variation in household demographic characteristics and wealth explains only a negligible fraction of the difference between India and the rest of the world. “The remainder can be attributed to differences in household behaviour, which is partly determined by exposure to the Indian institutional context,” says the report.

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