Where do Indians save their money?

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Indians have one of the highest savings rate in the world, yet the performance of its equity market and debt market is largely dependent on FII (Foreign Institutional Investors) inflows. RBI publishes yearly reports on various metrics and has conducted surveys to establish the investing pattern of Indian households. Some of the facts are provided below:
  • Gross domestic savings of Indians as a percentage of GDP is @30.11% (Rs.30 Lac crores p.a)
  • Per RBI, 10% of this forms financial assets (~Rs.10.48 Lac Crores ~$174 bn pa)
  • Out of a total of 227 million Indian households, 11% (24.5 million) are investor households
  • Remaining 89% households invest only in safe-assets
  • Of the 15.3 million URBAN investor households, 43% have strong preference to Mutual funds
  • 41% households feel lack of transparency is an issue in investing in capital markets
  • 53% households are highly risk averse
A breakdown of the choice of savings instruments over the last decade is provided below:
  • 46% - Bank Term deposits
  • 17.1% - LIC
  • 12.5% - Pension plans (EPF/PPF)
  • 11% - Small savings
  • 9.9% - Cash
  • 3.4% - Equities/MFs/Debt
The data reveals a strong investment preference to securing capital. Only households with higher levels of fixed assets and those with higher education prefer investing in capital market instruments (Equities, MFs and Debts).  As a result, Indian retail investors participation in equity markets is barely 1.3% while it is 27.7% in US and 10.5% in China.

Several studies and surveys points to lack of transparency in capital market instruments and lack of investor education and awareness as the primary reasons for the non-participation of Indian households in the equities and mutual funds segment. Another bottleneck is the lengthy and complicated process involved in the opening of accounts and dealing with several forms/online accounts, e-statements and the hidden charges.

SEBI, AMFI and IRDA have begun to address these issues lately through the launch of a number of investor-friendly measures. On its part, the Finance ministry has also introduced several schemes via tax-savings BUT the Indian investor is not impressed. This makes you wonder whether the Indian investor is being so dumb or is he/she smarter? Next article on "Are Indian Investors smarter?" explores this viewpoint.

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