India’s fascination for the glittering yellow metal has always been intriguing to say the least, especially after the latest RBI report finding that a staggering 11% of the total wealth is invested in gold. RBI says that a minor re-allocation of the amount invested to financial assets can create sizeable wealth for the investors.
India’s fascination for the glittering yellow metal has always been intriguing to say the least, especially after the latest RBI report finding that a staggering 11% of the total wealth is invested in gold. Even as we see unprecedented inflows to the tune of Rs 20,362 crore into equity mutual funds in August, RBI report reveals that this amount is only the tip of the iceberg, as a whopping 84% of the total wealth in India is invested in real estate and other physical assets, while 11% is invested in gold, making only 5% of the residual money available to find its way into financial assets such as mutual funds, bank fixed deposits and so on (both debt and equity). Clearly, the mutual fund inflows pale in front of the amount invested in gold.
In an interview to CNBC TV18, Dr Tarun Ramadorai, Chairman of the Household Finance Committee set up by RBI said, “Fascination for gold and real-estate in India is a multi-faceted problem. Deep rooted cultural beliefs about gold, obtaining gold loan easily, and tax evasion seem to be the most important factors for preferring gold.”
In the same conversation, Dr Ramadorai points out that this preference for gold has actually hurt the investors, as financial assets have outperformed gold by heads and shoulders. In fact RBI says in its report that just a minor reallocation of wealth away from gold to financial assets will help the investors to create wealth, sufficient to move them up by more than 1% in the overall wealth distribution.
In the RBI report, elaborating on the benefits of moving 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.”
RBI has two more suggestions for securing your personal finances- plan your retirement corpus and finance your home with a mortgage. According to RBI data, 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.”
Regarding mortgages, RBI notes, “Despite the high holdings of real estate in India, mortgage penetration is low early in life, and subsequently rises as households 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.