Financialisation of savings & SIPs are all very well but 75% of Indian wealth is in cash: Harish Krishnan

Harish Krishnan, Co-CIO & Head Equity, ABSL AMC, says over the last 10 years or so we have seen a material shift towards financialisation of savings that got accelerated post demonetisation in 2016, where we saw a lot more coming into the financial market. But even now, it is just a small fraction which is getting allocated for financialisation of savings. That is the bigger picture . Another point is that the total amount of cash which is there in various households is almost 75% of the total value that have been put into equity instruments, either through direct purchase of equities or through products like mutual funds where they come in via the SIP route.

”

It is a very interesting piece of research your team has put out. What shifts are we talking about here and how durable do they appear?
Harish Krishnan: This report is talking about the household savings pool and how that has evolved over time. Now, obviously, it is a very personal topic given the fact that the habits of savings and where it is allocated change over generations and what is typically considered as wisdom passed on from, say, one generation to another kind of persistence over a long period of time. So, over a period of time, we have generally seen a financialisation of savings.

When we talk about the word savings, there are two aspects that one needs to differentiate. One is, let us say that in a year we earn some income and on that we have a savings pool coming through so that is like the flow of savings and then you have got what you already have allocated over periods of time, say, like an FD instrument, etc, which also gives in a certain amount of interest income and then that stock of savings, how that is allocated is what we have considered.


We have seen over a period of time that there is a dramatic increase in the overall savings stock of household wealth in India, which is obviously a welcome news and a lot of that savings in India has been traditionally driven by physical assets and to a certain extent into financial assets. There are broadly two big buckets of physical assets, which is one is into real estate or property, as it is called, and the second is into gold and both of these continue to be quite strong with more than two-third allocation and beyond into physical assets.

Then there are financial assets, which include various asset classes, including equities, including fixed income in the form of deposits which are there in various banks, etc, and then also the longer-term savings construct, be it in terms of PF and other products which are financial in nature. What we have seen and the important thing is that clearly over the last 10 years or so we have seen a material shift towards the financialisation of savings that got accelerated post demonetisation in 2016, where we saw a lot more coming into the financial savings.

But even now when we talk about it and when we look at these numbers, we realise that it is just a small fraction, which is getting allocated into financial savings so that is the bigger picture that we are talking about, that we have made just a small tilt towards financial products and within financial products a significant amount is still into traditional products like fixed deposits, which obviously have a role and place in any portfolio primarily because they give greater certainty in terms of cash flows, etc.

What we have seen is that its ability to beat inflation is almost at par with that of, say, various other asset classes, including equities over a three-five-year rolling basis. Therefore, given the fact that it can also underperform inflation on a rolling three-year basis on a similar construct to that of equities, do we really not benefit by moving more and more into equities which has the ability to double the money over a reasonable amount of timeframes, typically between seven to eight years, there has been a doubling of wealth in equities even in some terrible phases.

Compare that to, say, the fixed income or fixed deposit instruments where post tax possibly doubles every 15-16 years. So, the question that we have is that even in terms of what we think is financial savings can more and more start coming into products like equities.

The second and possibly most startling observation that we have is that while we keep talking about SIP numbers and how big they have become and how large they have become, etc, the total amount of cash which is there in various households is almost 75% of the total value that various households have put into equity instruments, either through direct purchase of equities or through products like mutual funds where they come in via the SIP route.

So, 75% of the wealth in equity markets from a household point of view is just in cash, earning nothing for the households. So massive shifts can happen over periods of time.

You have also done some comparisons of this shift in other developed economies in the past. What does history show? What phase of this shift would India be in right now? Some call it the 401(k) moment in India, etc. Is it the early phase or the mid phase and this shift has started? So you think it could be a decadal or even longer phenomenon?
Harish Krishnan: I think we are in the very early stages of this cycle. We are nowhere close to the mid cycle. Equities as a percentage of either the total GDP or the total wealth, if we were to look at it, we have just gone back to close to about 2007 levels. So, while obviously from 2007, levels went down over the course of the last 10 years or so we have inched back up. So, we are nowhere close to a mid-cycle also, so that is point number one.

Secondly, when we look at markets like the US, where we have seen a rapid shift of financialisation of assets, as you rightly called out from the 401(k) kind of regulations that kicked in, where we saw close to about 45% of household wealth into equities. We are like a small, tiny fraction of that today and so we think that given the EPFO mandates that have come through and which will potentially further increase their allocation to equities with a growing cult of what we are seeing in terms of investors’ attention span coming into equities with a growing SIP culture and with the growing trends of moving into more evolved categories, including products like asset allocation products that various mutual funds offer, we do think that there can be a material shift.

If I were to call out what we have seen so far is just the flow part, which is basically like I said the savings that come from a yearly income that is moving more and more into say financial products and including equities. We have not yet touched the stock of assets, which is the balance sheet of assets that has just not yet started and we think that a lot, lot more will come in as more and more generations of Indians realise that a lot of their wealth historically has been put into commercial real estate, has been put into assets, including gold which is a great asset, nobody is kind of disputing the validity of these assets, but do we need in that proportion that we have is where the question really comes through.

More and more wealth of people, which is the balance sheet or the stock of savings, is moving into markets. We have just about started that journey, so it is a long way to go. We have seen this happen in the US wherein over say two generations over say 50-60 years we have seen that move from, say, a single-digit number in terms of their equity allocation by households move up to 45-47%, we are currently in the mid-single digits in terms of our allocation to equities and we see a material shift happening over generations and over decades as more and more Indians adopt this financialisation of their savings.

Let me play the devil's advocate. This is an asset class which is performing right now. A lot of investors tend to be chasing performance. If we get into some kind of a bear market in one or two years, do you think these flows could be fickle? Could they go back or do you think this time it appears more structural?
Harish Krishnan: Clearly near-term callouts of asset classes are difficult and should not colour their allocation trends. Just like we buy into real estate or we buy into gold, it is not necessarily to take a call saying that the next six months or the next two years their prices are going to be higher. Of course, we do want it in terms of either greater assurance of savings or in terms of capital appreciation over the long term without necessarily minding the near-term journey of these asset classes.

I think a similar kind of a construct is starting to emerge into asset classes of the financial side including that of fixed income as well as more importantly into equities. So, that shift is starting. The only solution to it is to think in terms of the time to double money. The time to double money in various asset classes, including FD like I said, could range from maybe 14, 15, 16, 17 years on a post tax basis. While there can be shocks over the course of the next two, three, four years the time to double money in say an equity construct varies from as low as say eight-nine months if you had bought it at the absolute bottom on March 23rd, 2020, then your money doubled in less than a year's time, it could take maybe about 14-15 years if you had bought it at the peak of 2008 then it took that much amount of time. The reality is that on an average, it is between say six to nine years which is where bulk of the household wealth can get created.

The third and last point is that as someone who wants to allocate more and more into equities and where we are just at the starting point, ideally we would want lower prices than higher prices. So, effectively, we should as a society actually welcome lower prices in the near term so that we can put more and more money into work at better prices rather than wanting the benefit of a small mark to market on the small allocations that we have put into equities so far.

I would think that a growing trend of educating households, growing campaigns that the industry has been doing, all of that suggests that over the medium term, we are going to see a lot more moneys coming into equity markets from household savings.