INDIAN households are not as conservative in their financial investments as many believe. The household sector, which includes individuals and non-profit institutions serving households directly, owned 21.5 per cent of India’s listed equity market as of June 2024, much higher when compared to other developed markets, excluding the US, according to a research report. This ownership has remained within a very narrow range of 21-22 per cent since the beginning of the calendar year 2021, following a more stable period of almost five years when it was between 18 per cent and 20 per cent prior to that, and between 16 per cent and 17 per cent during 2011 to mid-2016, the report prepared by Motilal Oswal Financial Services said. “If we combine the direct and indirect exposure (mutual fund investments) of the household sector, referred to as equity & investment funds (E&IFs), it amounted to Rs 134 lakh crore (US $ 1.6 trillion) or 44 per cent of GDP in the first quarter of FY25,” the report said. India’s equity market capitalization jumped more than 50 per cent year-on-year to Rs 441 lakh crore as of the quarter ended June 2024, while the holdings of the household sector surged to 95 lakh crore during the period from Rs 60 lakh crore (or 20.6 per cent of the equity market) in the same period last year, says the report. The E&IF figure is again comparable to the 30-55 per cent range observed in most advanced economies covered in the study. However, it is less than half of 100 per cent of GDP in Canada and 161 per cent of GDP in the US. Further, the share of E&IFs increased to 28 per cent of GFAs of households in India in 1QFY25, compared to 17 per cent at the end of CY19, the Motilal report said. Notwithstanding the stable share of the household sector in listed equities, which has experienced occasional step-ups, the impressive surge in equity market capitalization over the past year has propelled the market value of household gross financial assets (HHGFA). Barring the US, the household sector owns between 11 per cent and 18 per cent of the listed equity market in other major economies, which is lower than 21-22 per cent share in India, Motilal report said. The share, notably, is much higher at 40 per cent in the US though. Further, the share of the household sector in the listed equity market has increased in the post-pandemic period in India, Germany (DE), and the US, while it has declined only in Canada (CA), with a largely stable share in other economies. Direct exposure to listed equities, however, constitutes only a portion of the total exposure of the household sector. “Mutual funds (MFs, or investment funds) also play a very important role, and thus, we combined both direct and indirect exposure (through MFs) to determine the total exposure of the household sector to the securities market,” it said. With investors pumping into equity schemes of mutual funds, the total size (or the asset under management, AUM) of India’s mutual fund industry reached Rs 61.2 lakh crore as of June 2024, up 38 per cent from a year ago. The household sector (including high net worth individuals and retail) owned about 63 per cent of the MFs AUM, up from 55 per cent in December 2019 and 50 per cent in 2014-15, the report said. Within this, equity instruments accounted for about 70 per cent, while non-equity constituted the remaining 30 per cent (almost the same as in December 2019 but much lower than 50 per cent a decade ago), the report said. The RBI recently released its first-ever quarterly estimates of the household financial balance sheet from 1QFY12 to 4QFY23. “We replicated the RBI’s methodology and achieved 96-97 per cent accuracy in our result,” the report said. “We extended these estimates to Q1 of FY25 based on some assumptions. One of the key developments has been the rising prominence of the equity market in household gross financial assets during the past few years, particularly since the onset of the pandemic,” it said. Overall, there is no doubt that the role of the equity market in household financial balance sheets and financial net worth has increased significantly in the post-pandemic period, particularly over the past 4-5 quarters. This trend may contribute to the growing wealth effect within the household sector. However, the declining level of household savings (flow, annual data) and the usual concentration of financial wealth among a specific group (the top of the pyramid) suggest that further research and more granular data are necessary. “Further, one must think twice before calling the Indian household sector conservative in terms of its exposure to the equity markets,” it said.
