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Tap into the financialization of Indian savings without hassle

RBL Bank Dec 02, 2019

Historically, households have been the largest contributors to both savings and investment in India. Till recently, most of the Indian household wealth was locked in physical assets such as real estate and gold, with only a small portion going towards financial assets. According to 2017 Indian Household Finance report by the Reserve Bank of India, the average Indian household held 95% of its assets in physical form and the residual 5% in financial assets. However, since then, a lot has changed in the Indian economy leading to a surge of interest in capital market investments, especially via mutual funds (MFs). Government initiatives and reforms such as demonetisation, introduction of goods and services tax (GST) and regulations such as the Real Estate (Regulation and Development) Act, 2016 (RERA) and the Benami Transactions (Prohibition) Amendment Act, 2016 have led the shift towards the formalisation of the economy, and in turn, financialization of household savings. Demonetisation, in particular, has been the key driver behind the acceleration in the financialization of savings. Experts believe that households can earn substantial ongoing income gains from the shift of savings and investments to financial assets from physical ones.

The trend of financialization of Indian household savings is largely being driven by the surge in mutual fund inflows. “Reduction in interest rates on bank deposits after demonetisation and decline in gold price enhanced the relative attractiveness of both debt and equity oriented mutual funds,” said the RBI in a report. This is clearly reflected in the surge in assets under management (AUM) by mutual funds. In November 2016, the AUM of mutual fund industry stood at INR 16.5 trillion, touched an all-time high of INR 17.5 trillion by end-March 2017 and has further increased to INR 24.3 trillion by June 2019. The sustained rise in MF investments is also due to better performance of equity asset class compared to real estate and gold, and increased awareness, access and faith in equity market opportunity. It is no surprise that equity-oriented MF schemes derive 88% of their assets from individual investors, according to the Association of Mutual Funds in India data. Apart from providing steady and above-average returns, MFs enable people to invest even small amounts periodically through Systematic Investment Plans (SIPs), bringing the power of compounding returns to the masses. The success of SIPs has been a crucial contributor to the growth of the MF industry, with annual SIP inflows more than doubling from INR 439.2 billion 2016-17 to INR 927 billion in 2018-19.

Despite the recent spurt in financialization of savings through mutual fund investments, the depth of the MF market in India still lags behind the global average. While the penetration of mutual funds as a ratio of AUM to the Gross Domestic Production (GDP) jumped from 9.0% in 2015-16 to 12.7% in 2017-18, it is less than a quarter of the world average, and below that of many other emerging markets. This means that there is a lot of headroom for growth in this area and financial service providers need to leverage digital channels to provide last-mile investment accessibility to the untapped customer base, especially to those living in rural areas.

At RBL Bank, in order to make investments more convenient and accessible to our customers, we have recently launched an online platform - Invest First - for mutual funds. Users can access this facility on our internet banking platform, as well as the MoBank app, to buy MF schemes through a few simplified steps which can be completed within a matter of minutes. Invest First enables our users to purchase, switch or redeem funds, track investments and carry out paperless transactions in a secure and efficient manner. Above all, such digital initiatives can bring the benefits of mutual fund investments, which is disproportionately concentrated in tier-I and tier-II cities, to people living in semi-urban and rural areas, realising the dream of a financially inclusive and proactive India.

Disclaimer: Articles published on the website are merely indicative and suggestive in nature and do not amount to solicitation. The contents do not guarantee the desired returns and/or results. Reader is advised to exercise discretion and consult independent advisors for achieving desired result. Visitors to this blog/ website w.r.t products & services offered by RBL Bank Limited herein, shall ensure that the comments / feedback posted shall be restricted to the contents published herein and shall not contain such language that may be un-parliamentary or against any religion, caste, section of society, political view etc. While our endeavor is to publish the comments that are submitted, however, all comments/feedback shall be subject to internal review by RBL Bank Limited. We do not guarantee that the comments that are submitted will be published.

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