How does India invest?
Fixed Return v/s Equity and Mutual Funds
When you hear the word investing, most people probably think about equity, mutual funds, or some other asset market. Maybe a minority would think of FDs or other traditional instruments at first. And this might make you think that people tend to invest a major chunk of their funds in slightly higher risk and higher return assets.
But as disciplined investors, simple baseless assumptions don’t cut it. Our opinions need to be based in fact, and on reliable data.
Recent data published by the RBI (on October 19, 2023) shows an interesting trend: Indians allocated over 80% of their funds in assets to fixed income securities during the period from Q1 2020-21 to Q4 2022-23. And almost 34% of the total funds have gone into deposits, be it with banks or other financial corporations.
In fact, only 5-10% of investments were made towards equity and mutual funds, with another 10% in money markets. While this number has been growing steadily, fixed income assets still hold a significant share of investments.
But why?
While the attractive potential returns of equity markets have long been the focus of investment discussions, there has remained a steadfast inclination towards fixed income assets in India. To understand why, let's delve into the factors influencing investing behaviour, and particularly how it is different in Indians.
1. Availability of capital:
A major determiner of how much risk you are willing to take (known as risk appetite) is the available capital you can afford to lose without significantly impacting your lifestyle.
With the per capita income in India being significantly lower than that of more developed nations, most people have little to no risk appetite when it comes to investing their hard-earned money. This leads to them choosing safe, reliable fixed-return investments over more volatile markets.
2. Simplicity
With India being a developing nation, financial literacy is another factor adding to the trend. With this in mind;
You could invest in familiar, tried and tested assets like FDs, and simply let your money compound with minimal risk and no additional effort on your part.
OR
You could spend time trying to understand the intricacies of different investment avenues, and still take on risk after that, for a possibly better return.
It’s fairly obvious which of these options the average wage-earner would pick, no?
3. Cultural bias:
The cultural mindset plays a pivotal role in shaping investment choices. Indians, traditionally risk-averse, often prioritize stability over aggressive wealth creation.
While the allure of stocks and equity investments exists, the fear of market volatility and potential losses tends to outweigh the desire for high returns.
Fixed income assets, such as government bonds, FDs, and corporate debt, provide a sense of security and reliability, aligning well with the cultural inclination towards saving for the future.
While there are countless other factors influencing investing behaviour, these factors broadly cover why we invest the way we do.
While fixed income dominance prevails, it is essential to recognize that the investment landscape is dynamic, and perceptions may evolve with changing economic conditions. And even among fixed income assets, picking the ones best aligning with your investment goals can sometimes be a challenge.
At Stable Money, we hand-pick our partners to ensure you get the best returns, regardless of your financial goals. And with FD rates currently looking to go down from their highest in the past decade, there’s no better time to invest!
As we navigate the financial terrain, it is crucial for investors to strike a balance between risk and return, aligning their portfolios with their financial goals and risk tolerance.
In today’s edition, we’ve shown you how India invests and why. At Stable Money, we’re going to keep you informed and up to date with the financial landscape of India to ensure you make the best investment decisions.
Best,
Team Stable Money