India's Hidden Stock Market Investments

Indians invest more in equity than what meets the eye

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Today in less than 5 minutes:

1) India’s hidden stock market investments
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Uncovering the true equity investments of Indians

Nilesh Shah, MD of Kotak Mahindra AMC and (now) a Twitter celebrity, recently shared data on household savings by Indians, saying that they “invest too little in equity”…

He goes on to claim that most Indians are not able to earn a positive real return. On the other hand, data is supporting the fact that India is seeing a continuous rise in equity inflows, and the base of retail investors is ever-growing.

This made us dig deeper.

Direct Equity Investing is a big ‘NO’

Direct investing in stocks is limited mainly because:

> Risk Aversion: Many individuals, especially older generations, still associate stock market investments with scams, equating it to gambling. This perception is changing, but it will take time.

> Lack of knowledge: Most people rely on friends, family, and mutual fund brokers for their investing decisions. They do not know which stock to buy and prefer staying away from the markets due to fear.

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However, equity interest has risen over the years. Outstanding investments in equity MFs as a percentage of GDP have increased, indicating a shift toward more stock exposure. There are other ways money is flowing into equity too…

Equity money flow is more than you think

The data from April 2020 to March 2023 shows that out of the total household financial savings of ₹86.2 trillion, only about ₹5.1 trillion (6%) flowed into mutual funds (MFs) and stocks, indicating a low investment in equities.

However, this interpretation overlooks indirect equity investments made through other channels. Let’s see how.

1) Insurance Premiums
A part of the insurance premium paid by households flows into equity. This is because some of the corpus held by insurance companies is invested to get a good, inflation-adjusted return, although that limit is capped.  LIC alone had invested in around 300 shares by December 2023.

2) EPFO
In August 2023, the government revealed that the EPFO had invested ₹1.29 trillion in Exchange Traded Funds (ETFs) from April 2020 to March 2023. EPFO started investing in stocks in 2018-19. Here’s how much was invested in FY20 - FY23:

EPFO Investments from FY20 - FY23

3) National Pension System (NPS)
The NPS also indirectly invests in stocks. In fact, youngsters have the option to invest up to 75% of their assets in equity.

Considering these indirect routes, it's evident that more household money is finding its way into stocks than initially thought, via indirect ways.

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