Friday, May 11, 2012

Are stocks and MFs bearing the brunt of gold?

Even the rich today cannot deny that every penny saved is equal to every penny earned. Especially when liquidity is tight and high returns are hard to come by. But Indians have shown sufficient foresight with their savings. Since the time the Indian economy bore the merits of liberalization, our savings and investments reflected that. In fact that ratio of domestic savings to GDP (Gross Domestic Product) has been the highlight of the economy's growing fortitude. Having nearly doubled from 22% of GDP in 1991 to 40% in 2007, the rise in savings offered a major boost to investments as well. The domestic investments comprised nothing less than 36% of GDP in 2007. This was up from 26% in 1991. The healthy trend not just ensured that our GDP growth rates were enviable to the rest of the world. But the debt burden in the hands of Western households seemed unrelated in the Indian context. What is more, financial assets like stocks, mutual funds and debentures gradually became more acceptable to retail investors.

But a lot of water seems to have flowed under the bridge over the past 5 years. To begin with high inflation and negative real interest rates on bank deposits dissuaded retail investors. Stocks, debentures and mutual funds too gave jitters after the stock market crash of 2008. Moreover, lack of clarity on policy issues made investors sit on the edge. The insurance and mutual fund industries in particular saw a lot of regulatory flux. As a result some investors chose to completely stay away from them. Stock markets too failed to retain confidence of those having been cheated by unscrupulous brokers. In the meanwhile, gold as an alternative asset class got prominence. That its inflation hedging quality is vital to every investor's portfolio became well known. Hence steadily investments started shifting from financial instruments to assets like gold.

Not that stocks and mutual funds were an overwhelming proportion of Indian household investments earlier. Together they were less than 15% of GDP in 2007. Unfortunately, lack of confidence in their safety and returns has reduced the proportion further by 2012. As per HDFC, mutual fund assets under management (AUMs) have dropped from 12% of GDP in 2010 to 8% by 2012.  Clearly, the decline in savings in financial assets is not just to do with favoritism towards gold.Also, the shiny metal, though necessary, cannot serve all investment needs. Therefore to boost the flow of savings to financial assets, the need of the hour is better regulation and more incentives. This in turn will ensure more economic stability to India's prospering middle class. At the same time it will save Reserve Bank Of India (RBI) the trouble of managing forex volatility due to excessive gold imports.

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