Mutual Funds, debentures score over conventional options for savings

Household savings in financial assets like deposits, stocks, cash and currencies, and mutual fund and pension fund products have touched a five-year high. Preliminary estimates by Reserve Bank of India, in its annual report for 2015-16, shows household net financial savings rate increased to 7.7% of gross national disposable income ( GNDI).

This reverses the trend of individuals preferring physical assets like residential real estate, gold and other intangible assets to park their savings. Some attribute this trend to a slowdown in inflation, resulting in more savings potential among households. But the flight towards financial assets is also due to waning attraction of physical assets. While returns on gold has dipped as prices fell to multi-year lows, prices of residential realty assets went through the roof, making investors wait for prices to cool down.

Granular data on financial savings indicate a shift away from deposits, which still account for almost half of financial savings, to stocks and debentures and even mutual funds. While the share of deposits has shrunk from 4.9% in FY15 to 4.7% of GNDI in FY14, the share of equities and debenture, though still small, rose from 0.4% to 0.7% and that of small savings like post office deposits went up from 0 to 0.4%. The structural shift in small savings could also be due to a gradual dip in deposit rates as banks have taken cue from RBI, which has lowered benchmark repo rates by 125 basis points, even though the transmission of rates is perceived to be inadequate. Gayatri Nayak gives a snapshot of the current savings landscape in India.