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Posted by: Deepa Vasudevan on Tue, May 29th, 2012

The Risk-Averse Indian Investor

The pie-chart below shows the average holdings of financial assets by Indian households between 2000-01 and 2010-11 (Pic 1). Deposits, mostly with banks, dominate the portfolio. A tenth of total assets is in currency; a similar amount goes to the government through small savings schemes.  Since there is no social security in India, life insurance and provident funds tend to be allocated significant amounts from total household savings. Finally, capital market instruments- such as shares, debentures, mutual funds get less than 5% of total investment.


Pic 1 Decomposition of the portfolio of Indian Households: 1990/91 to 2010/11


Decomposition of the portfolio of Indian Households: 1990/91 to 2010/11

Data Source: RBI annual report, various years


Clearly, households seem to be quite risk averse, and prefer to invest in assets that are safe, familiar, and offer security of capital.  Over a 20 year period when Indian capital markets have grown tremendously on many parameters, very few households have ventured too far beyond their bank, insurance agent, mandatory retirement funds and small savings. In fact, since 2000, household exposure to the capital market has crossed 7% only once, in 2007-08 (See Pic 2).


 Pic 2  Trends in Portfolio Composition of Indian Households


Household exposure to the capital market

Source: RBI Annual Report, various years


Why does this happen?  A SEBI-sponsored household survey provides some startling insights into household saving preferences*.  The study estimated that India has approximately 227 million households, of which only 24.5 million invest in equity, debt, mutual funds, derivatives and other instruments in the capital market.  That represents about 11% of the household sector. The remaining 89% are also likely to be net savers, but rely on non-risky avenues such as banks, insurance or post office savings instruments.


Among the households that did not invest in the secondary market, nearly 41% felt that they had inadequate information about financial markets and lacked investment skills. This perception was prevalent across various income groups and education categories. In addition, a stunning 16.5% of the most educated** and 16% of the upper middle and upper income groups thought that investments in the secondary market were not safe!


These results, though unflattering to our educated middle class, point to a great opportunity for the financial sector.  For educators, trainers and industry associations, the challenge is to increase public awareness of the importance of financial planning while informing potential investors about the risks and returns of different investments. For finance professionals, it is a signal to develop products keeping in mind the inherent risk-averse nature of Indian households.  For regulators, it is a warning to get the macro-structure in order, so that systemic crises that erode investor confidence are minimised. And for the government, it is a chance to bring untapped savings into financing economic activity.


Why should the finance industry and policy makers bother? Because household savings contribute 60-80% of India’s gross domestic savings, and has been its most stable and highest component for over six decades. In 2010-11, gross household financial savings was estimated at Rs.10,43,977 by the RBI***. That is approximately $220 billion. If we could spur savings by, say, 10%, and attract that towards corporate debt or equity, then we have an additional $22 billion domestically available and flowing into our capital markets. That, incidentally, is more than the $17 billion that FIIs brought in during 2011-12!  For a country that is starved of savings to fund its current account deficit, it would be wise to spur domestic savings as well as attract foreign inflows****.

* How Households Save and Invest: Evidence from NCAER Household Survey, July 2011. Available online at

** Most educated is defined as those having 15+ years of schooling in the survey

*** Source: Appendix Table 4, RBI Annual Report 2010-11. Available online at

**** The accounting identity is that current account deficit equals savings minus investment. Savings here includes domestic savings as well as foreign inflows 

Ghanshyam Dubey on Fri, Jun 8th, 2012 9:08:38 am

I agree with Mr. Gaurav, our leaders leaders are risk averse. A top leader of CPM on TV called BSE & NSE 'gambling den' for rich & corporates. No doubt our leaders are financially illiterate and NSIM should launch a special program to educate our policy makers. Common people are left to be cheated by dubious investment schemes. There are hundreds of 'Investment Plans' by dozens of Insurance Cos. which never yield any real return (discounting inflation). They spend most of people's money on commissions, incentives, publicity, & office expenses. A lot of miss-selling is going on but IRDA keeps mum. On the other hand SEBI, the Capital Market Regulator, in the recent past has brought uncalled regulation that curbed the meager income of the distributors. No surprise, 80% of IFAs have stopped selling Mutual Funds, they prefer selling insurance that pays 10-20 times more commission. Rural India knows bank, post-office, LIC, Sahara & hundreds of fraud companies but not Capital Market or Mutual Funds. Reason? Fund Houses has no money to open & maintain offices in smaller towns including district Headquarters. Hundreds of districts have no CFAs. Who is going to educate the villagers? NISM is doing no better, it keeps imposing new norms & higher fees, making CFA a loosing proposition. Our government wants people to remain 'Financially Illiterate, so they keep on being fooled.

Ganesh Palit on Tue, Jun 5th, 2012 1:16:48 pm

The comments of Sourav Ghosh appears to be correct. We need policy maker should be clear in their ideas. They should realize and implement policy in such a manner, so that long term money flows to market and stay for a long term. The Rajiv Gandhi Equity Scheme announced by UPA Govt. should routed through MF instead of direct investment in stocks.

Blog Author on Sat, Jun 2nd, 2012 3:04:59 am

Dear VIJI, The Rajiv Gandhi Equity Scheme announced in the March 2012 Budget is a small step to tap household savings and direct it to the equity market. So far the details have not be laid out. But such schemes, if implemented with safeguards, can really increase flow of funds into capital market

ganesha on Fri, Jun 1st, 2012 9:53:04 am

Interesting article. Govt should encourgae Equity/MF investment among the common people by giving some sort of sops like Additional Tax rebate etc.,

vk on Thu, May 31st, 2012 4:39:00 pm

Good flow with RBI data.

usha on Thu, May 31st, 2012 3:58:20 pm

yes...what you have told is correct. "Among the households that did not invest in the secondary market, nearly 41% felt that they had inadequate information about financial markets and lacked investment skills. This perception was prevalent across various income groups and education categories. In addition, a stunning 16.5% of the most educated** and 16% of the upper middle and upper income groups thought that investments in the secondary market were not safe!" we don't want to take risk.Even in insurance we are not getting the expected/assured returns. In turns, we were told ..floating...fixed...etc..etc. why not the policies in simple understandable words?

Deepak on Thu, May 31st, 2012 2:58:24 pm

U have not touched on investment by a sizable Indian population as savings in gold,real estate , chit funds.

VIJI on Thu, May 31st, 2012 12:35:10 pm

Good article. RBI data is amazing. But why Govt. & Regulators not doing much to tap the money lying (idle)in the house hold segment as shares & debentures acoount for just 3.4%?

s v vyas on Thu, May 31st, 2012 10:31:21 am

Again ab usful and informative article from deepa madam, Amfi and SEBI and other goverment body look seriously in this matter and come out some better idea to push invesments in MF and other steps to educate the general public about MF and equity

ramu suriyanarayanan on Wed, May 30th, 2012 6:01:18 pm

It is a very nice article to read and shows that lot of money tobe tapped towards Mf industury and awarness to created.

Kuldeep Sikarwar on Wed, May 30th, 2012 5:43:04 pm

This means that most of the household savings are not even beating inflation. Mutual Funds can turn out to be a good vehicle for such people who feel they do not have much information to invest in equities. The piling up investor education fund can be used for a good purpose here.

sourav ghose on Wed, May 30th, 2012 4:58:30 pm

It is not the common people who are risk averse.It is the policy makers who also rarely venture into equity markets/mutual funds.Unless they feel the need to invest into equity market/mutual funds,the policy to encourage the same will be lacking.With banks now offering near about 9% for 5-10 year period it is logical for an investor to lock into the fixed rate for a long time rather than take a risk where the market has been range bound and below its peak for the last 4 years.Unless the interst regime is substantially low--6%-to 7%,invetors will not take the risk of investment in equity market,mutual fund and that too in a very strict regulatory conditions.The risk premium return should be around 4-5% based on low bank rate.Where the bank rate is near or around double digit,the risk averseness increases because the macro economic condition increases the risk of investment in equities.It is through general provident fund,EPFO that money can flow into equity market but as said in the begining ,the policy makers are themselves risk averse hence it has not been successful. A survey should be conducted among the policy makers,bankers,MPs,MLAs,RBI governors,SEBI,NSE officials as to what % invest in stocks,mutual funds.

JAG MOHAN KHANNA on Wed, May 30th, 2012 4:27:11 pm

This is a interesting piece of reading for academic interest. However the confidence of SEBI amongst general public can very well be imagined that even well versed qualified investor would not risk the money kept say for his daughter 's marriage into 2ndary financial market.

deepak mathur on Wed, May 30th, 2012 3:45:04 pm

Deepa madam, you deserve cudos for compiling such a nice article .Facts are known to us but nobody has highlighted it the way you have done . It`s infact an eye opener for govt, amfi and sebi and if we sincerely and seriously approach the household savings then I sincerely hope that sensex would be atleast double in numbers than what it is today. Once again , I compliment you on writing such an interesting article.

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