Wary of stocks, Indians cling to safe havens

July 30, 2012

Sometimes people suspect that the grass is greener in the next field … but they’re not always right.

Consider this. India’s gross domestic product has grown about 7 percent on an average per year for the past nine years. Its industrial growth has been steadily rising since then. Buoyed by economic growth, the country’s capital markets also offered itself as an attractive and inflation beating investment option.

That means that someone who invested at the end of 2002 in the BSE’s benchmark index, Sensex, would have made a 418 percent return on his portfolio by July 11 (just a random date). It sounds like the Madoff plan, but it’s not. The Sensex’s value on Dec 31, 2002 was 3377.28 which rose manifold to 17489.14 on July 11, 2012. Our market had its fair share of ups and downs, but it remained focused and depicted the country’s growth story.

However, that “someone” who made the 418 percent return most likely was not one of us. The average Indian investor has been satisfied with, and probably still wants, investments with a fixed return that comes from safer havens. According to the National Council of Applied Economic Research, Indians were called “wise savers but poor investors”. The statement found its base in the statistics that its Indian household Investor Survey revealed.

According to the survey, only 10.74 percent of households were investors (up from 7.4 percent in 2001-2002) while 89 percent were either saving in fixed income or are still clinging to their savings accounts. About 46 percent of urban households preferred to save, compared to 21 percent who chose investing.

In 2002, this was not a bad idea. India’s GDP grew at 3.7 percent that year compared with 2001. But in 2003, it jumped to 8.37 percent because of services (mostly financial, real estate and business services) and manufacturing sector which together drove this transition to a higher growth trajectory.

In the same year, the amount of foreign money entering India’s capital markets rose sevenfold. Most of this came from foreign institutional investors, who poured in 304.6 billion rupees ($5.5 billion), compared to 36 billion rupees ($665 million) a year earlier. They bought the Indian growth story; why didn’t we?

The Bombay Stock Exchange’s benchmark 30-share Sensex index started an unprecedented rise on May 6, 2003, climbing almost 67 percent to 5003 points seven months later. That was a better performance than nearly any other investment option out there. What did the Indian individual investor do?

You wouldn’t know because the Securities and Exchange Board of India’s handbook of statistics has no information. And as per the NCAER survey, about 43 percent of investors prefer to invest through mutual funds rather than jumping into the open field all by themselves.

Over the years, mutual funds’ assets under management in equity funds have grown immensely. It stands at $33 billion (assets in equity funds) as compared to measly $5.32 billion in March 2004.

The growth appears impressive. However, only 11 percent of the population is part of this smaller investor community. “Average” Indian investors might want to rethink their historical avoidance of stocks. Inflation (CPI) is 10.16 percent (May 2012) and rising, above the nine-year average of 6.98 percent.

In such a situation, saving will keep them safe … but will it keep them going?

3 comments

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Indians are wise Saver as well wise Investor, they were not lured by fraud companies depicting wrong picture in their balance sheet. And they understand the vicious nexus between Promoter, Fund Manager and Operator(Manipulator). So we should keep away from Equity and keep safe our Saving. Equity is the worst vehicle for investment. Its safe to keep our Investment in Fixed Instrument only

Posted by SHIVENDRA | Report as abusive

I have not found ADRs of Indian manufacturers listed on American exchanges very plentiful and the ones that are where not good deals. Quarterly reports are missing. One firm was found to be book cooking. In sort reliable data on firms treating share holders well was missing.

Since reports where India was growing economy I was looking into suitable ADRs but was not welcome.

Posted by Samrch | Report as abusive

I dont agree with the conclusion. Here’s why: Over 20 years Fixed Deposits have beaten the Sensex. In this calc, FDs were renewed every year while Sensex was buy-and-hold. If Long term FDs were used then the returns would have been higher. Its always easy to take any period of time to prove the case. If you take 2009 -2012, Equities were the worst off despite heavy FII inflows in 2010.

Also, “Investment” does not take into the account the vast Gold Reserves which Indian Households have which beat any fiat currency denominated investments.

Posted by skanekar | Report as abusive