Exploring India's Investment Landscape: Who's Investing And Why

India has witnessed a rising trend of investment in equities and mutual funds over the last few years. In 2022, 31% of Indians were set to invest in mutual funds, while 10% were to invest in equities, according to a report by LocalCircles. A separate report by Scripbox found that more than 81 lakh investor accounts were added in 2020-21. Data from India's two main depositories also revealed a record increase of 10.4 million active investor accounts in 2020, indicating a growing number of people investing in the country.

India's stock market participation

In India, stock market participation is relatively low compared to other countries. As of 2022, only around 3% of the population invests in the stock market, which is significantly lower than the US, where stock market participation is at 50%. This low participation rate in India is partly due to social and psychological factors, as many people view investing or trading in the stock market as gambling and prefer traditional investment methods like gold or fixed deposits, which are considered safer.

However, there are signs that this is changing, particularly among millennials. Data from 2020 shows that active investor accounts in India rose by a record 10.4 million, indicating an increasing interest in stock market investing among young people. This trend is also reflected in a survey conducted by Scripbox, which found that more than 81 lakh investor accounts were added in 2020-21. The survey also revealed that two in five families are likely to prefer investments in equities or mutual funds in 2022.

One reason for the increasing participation in the stock market could be the low-interest rates and the 25% rise in stock market indices in 2021, which have led to increased confidence in equities and mutual fund investments. Additionally, the pandemic has significantly impacted households' income, with many breadwinners losing jobs or facing salary cuts, leading to a shift in investment patterns and an increased focus on savings.

While the overall participation rate in the stock market is still low, there are some interesting demographics to note. For example, males dominate stock market investing in India, with the number of female investors being quite low. According to the data, only 9% of investors on the ETMONEY platform were females in the first year of operation, which increased to 19% by the fourth year.

Another notable trend is the increasing participation of investors from smaller towns and cities. While the mutual fund industry has traditionally been skewed towards metros and top cities, the rise of electronic communication devices and simple mutual fund buying platforms has democratized the industry and promoted financial inclusion. This is evident from the fact that contribution from T30 locations (top 30 locations for mutual fund assets) was 45% on the ETMONEY platform, while B30 locations (locations ranked 31st and above) contributed 55%.

In conclusion, while India's stock market participation rate is still low compared to other countries, there are signs of a growing interest in stock market investing, particularly among young people and those from smaller towns and cities. As more people join the stock market, it will be important for regulatory bodies to create awareness, establish trust, and promote understanding of markets and market-linked products to ensure a stable and sustainable environment for investors.

Mutual funds

India has a population of 140 crore people, and according to a report from February 2023, only 4 crore Indians have invested in mutual funds, which equates to around 8% of the population. This is a very low percentage compared to other developed countries, such as the United States, where 46% of the population invests in mutual funds.

There are several reasons for this low penetration of mutual funds in India. Firstly, many Indians are not aware of the benefits of investing in mutual funds, and they may be concerned about the risks involved. Secondly, some Indians may lack trust in the industry due to high-profile cases of misselling of mutual funds, which has damaged public trust. Additionally, the cost of investing in mutual funds in India can be high, which may deter some potential investors.

Despite these challenges, the Indian mutual fund industry is experiencing rapid growth. This growth is driven by several factors, including the rise in disposable income as the Indian economy expands, providing more people with the means to invest. Furthermore, the Indian government and the mutual fund industry have been working together to raise awareness about the benefits of mutual funds, leading to an increase in financial literacy. Government reforms have also played a part, making it easier for Indians to access and invest in mutual funds.

The mutual fund industry in India still has room to grow and develop, and as more Indians become aware of the benefits of mutual funds, the industry is expected to continue its positive trajectory.

Equity

India has witnessed a steady surge in the number of stock market investors in recent years. According to a report published in January 2024, India has around 87 million investors, a significant increase from 17.9 million in 2015. This growth has been attributed to the popularity of smartphone-based investment apps and increased mobile phone penetration. Despite this increase, only around 3% of the Indian population invests in the stock market as of 2023, which is lower than that of other countries such as China (13%) and the US (55%).

In terms of households, 17% of Indian households invest in the stock market, translating to approximately 50 million unique households. This indicates a preference for tangible investments such as real estate and gold, which is evident from household asset distribution. As of March 2023, 66% of household assets were tied up in physical assets, with real estate accounting for 51% and gold holding 15%. Bank deposits are the most popular financial asset, making up 14% of total household assets, followed by insurance and pension funds, each at 6%.

The low percentage of Indian investors in the stock market can be attributed to a cultural preference for tangible assets and a cautious approach to the volatile nature of the market. However, there is a gradual shift occurring, with a rising trend of investment in equities over the last few years. As per Scripbox, more than 81 lakh investor accounts were added in 2020-2021, and towns outside the country's top 110 cities saw a 50% surge in mutual fund investments during the same period. This shift is also reflected in a consumer spending outlook report, which estimated that 10% of Indians would invest in equities in 2022.

Mutual funds have played a significant role in bridging the gap for risk-averse individuals. They allow investors to indirectly invest in equities by leveraging the expertise of mutual fund managers. The mutual fund industry in India has experienced substantial growth, with assets under management (AUM) increasing from Rs. 8.25 trillion in 2014 to Rs. 53.40 trillion in 2024.

Fixed deposits

A fixed deposit (FD) is an investment option where individuals deposit a sum of money for a fixed period, earning interest on it at regular intervals or maturity. The tenure of fixed deposits can range from 7 days to 10 years. The interest rates offered depend on the bank, deposit amount, and tenure chosen. At the end of the tenure, the accrued interest is calculated on the principal amount, and the total sum is returned to the depositor.

Benefits of Fixed Deposits:

• Guaranteed Returns: FD interest rates remain the same from the time of deposit until maturity, providing certainty.
• Capital Protection: FDs booked with scheduled banks are insured by the Deposit Insurance and Credit Guarantee Corporation (DICGC) for up to ₹5 lakhs per bank per depositor.
• Tax Benefits: 5-year tax-saving FD schemes offer tax deductions of up to ₹1.5 lakhs under Section 80C of the Income Tax Act.
• Loan and Credit Card Facility: FDs can be used as collateral to avail loans or secured credit cards, especially beneficial for those with low credit scores.
• Flexibility: Fixed deposits offer multiple interest payout options (monthly, quarterly, half-yearly, or yearly) or a cumulative option that reinvests interest.

Types of Fixed Deposits:

• Standard FD: Offers higher interest rates than savings accounts and can be opened by Resident Indians, firms, companies, and Hindu Undivided Families (HUFs).
• Tax-Saving FD: Available to Resident Individuals and HUFs, offering tax deductions on the principal component. It has a 5-year lock-in period.
• Floating Rate FD: Interest rates are linked to an external benchmark, such as the RBI's Repo Rate, and returns fluctuate accordingly.
• Flexi FD: Allows linking FDs with savings or current accounts. In case of a fund deficit, the linked deposit can be partially broken without affecting the remaining deposit.
• Senior Citizen FD: Individuals aged 60 years and above can open these accounts, which offer higher interest rates than regular FDs.
• Corporate FD: Offered by Housing Finance and Non-Banking Financial Companies, usually with higher interest rates than bank FDs.
• Cumulative FD: The interest earnings are added to the principal amount, providing the benefit of compounding.
• Non-Cumulative FD: Interest is paid out at regular intervals, such as monthly, quarterly, half-yearly, or annually.
• Callable FD: Allows premature withdrawal of the deposit before maturity, but a penalty may be charged.
• Non-Callable FD: Opposite of Callable FD; withdrawals can only be made at maturity, and interest rates are typically higher.

Eligibility and Documentation:

Hindu Undivided Families (HUFs), Sole Proprietorship Firms, Trust Accounts, and other entities can open fixed deposits. For new customers, identity and address proof, such as KYC documents and recent photographs, are required. Existing customers of a bank can usually open FDs without additional documentation.

Millennial investors

Millennials are increasingly investing in mutual funds in India, with 47% of the 3.6 million new mutual fund investors in FY19 belonging to this demographic. This trend has continued, with a report by international research firm YouGov showing that 26% of millennials increased their investment activity in mutual funds in 2022, compared to 23% of Gen Z and Gen X respondents.

There are several reasons why millennials are investing in mutual funds. One reason is the good performance of the stock market in 2017, which saw a 28% increase, while interest rates on fixed deposits and savings accounts declined, making mutual funds a more attractive option. Additionally, equity-linked savings schemes (ELSS) have become a popular way for millennials to save tax due to their short lock-in period of three years.

Another factor contributing to the rise in millennial investors is the increase in financial literacy and the impact of the Covid-19 pandemic, which encouraged younger Indians to overcome their aversion to risk and explore alternative income sources. The transition from traditional broker models to online platforms and smartphone apps has also made trading more accessible and user-friendly, with over 55% of users of investment tech apps being millennials.

While millennials exhibit a preference for low to medium-risk investments, with 44% opting for systematic investment plans (SIPs), there is a growing trend of investing in IPOs. This is partly due to the expected entry of new-age tech companies into the public markets, which are companies that young Indians have seen grow and flourish within their lifetimes.

To summarise, millennials in India are a significant demographic of investors, particularly in mutual funds, and this trend is likely to continue as they seek to improve their financial well-being and take advantage of the opportunities presented by the country's economic growth.

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