Indian households have one of the lowest rates of capital market participation in the world. Of the almost 11% of their savings that are in financial assets (including currency, bank deposits, insurance policies, provident funds, etc.), less than 1% is invested in shares, bonds, mutual funds, etc. While a large part of this may be attributed to our traditionally risk averse nature, there are also indications that we do not really evaluate our options correctly. Most investor goals stretch over a 5-15 year horizon, and capital markets usually generate the best returns over such a span, with reduced risk of volatility.
What do we mean by that?
The return generated by an investment is affected by inflation and taxes, and the actual return earned is usually lesser than we estimate. Investors thus need to consider returns after adjusting for current inflation rate and the tax payable. In both these aspects, Indian capital market products have the advantage over other products.
Bank deposits, the first choice of investment for many families, can illustrate this point perfectly. A few years ago, around 2012-2014, bank deposit rates were in the range of 8.5-9.5%, while inflation was at 9.76%. We have seen that investors preferred deposits at this time even though they were actually losing money (because inflation was higher than the deposit rates). Now, when bank deposit rates are around 6.5-7%, and returns on deposits are higher than the 3% inflation, investors are making very low inflation-adjusted returns of around 3.5-4%. Add to that the fact that the interest earned on these deposits attracts income tax as per the investor's slab rate, and the actual rate of return reduces even further.
In comparison, the Bombay Stock Exchange (BSE) Sensex returned 16.49% over the last one year, or 85.23% over the last 5 years. And considering that all returns on equity investments held for over one year are tax free, you can see why experts believe capital markets are the most efficient investment avenue.
Almost 11% of an Indian household's savings are in financial assets. Of this, less than 1% is invested in capital markets.
With a growing economy and tax measures that encourage capital market participation, Indian investors cannot afford to ignore capital market products in meeting their medium to long term goals.
Equity investments have the most favorable tax laws. With a long term horizon that reduces impact of volatility, equities can thus offer the most efficient means of capital appreciation.