The RBI’s 2017 ‘Indian Household Finance Survey’ report highlighted that, amongst other things, “The average Indian household holds 84 percent of its wealth in real estate and other physical goods, 11 percent in gold and the residual 5 percent in financial assets.”
India is a country of savers and discretionary investors, where a majority believes in capital protection than return generation. This trend has only accelerated in the wake of the pandemic.
Amidst extraordinary market disruption, Indian investors are preferring to invest in the safety of physical assets over the volatility of other financial investment options.
A good investment is one that offers good returns despite the rate of inflation and is stable in the face of market fluctuations. In real life, however, you can either opt for active investments that include high-risk investments with high return potential or for passive investments that are low-risk investments. The choice depends on your requirements and risk profile. Physical assets such as real estate and gold comprise vehicles of passive investment as you buy and hold securities for a longer period, thereby assuming relatively lower risk while avoiding price depreciation.
The proclivity of Indians to invest in physical assets can be attributed to the following factors:
Risk-averse nature of the average Indian investor
India’s middle class and the emerging middle class carry low-risk appetites due to the scam-ridden years of the 1990s and late 2000s. They prefer holding most of their investments in terms of real estate and gold, where they would enjoy a non-inflation-adjusted rate of return. Market research estimates that only 2 percent of Indians participate in equity markets directly or through mutual funds, and there is almost zero direct participation in bond markets. This lack of risk appetite among Indians was a topic of debate at an online market summit organized by Federation of Indian Chambers of Commerce and Industry (FICCI) in July 2020.
The risk aversion of the average Indian investor is easy to understand once we look at the objectives they wish to achieve through investments. Unlike HNIs that seek to generate profits from their capital surplus, the average Indian typically does not have a capital surplus to put to use. Instead, they seek financial security and stability that come with the right investments. It is no wonder that, as per the RBI, most Indians, including the elite, have allocated the majority of their wealth to assets not generating a real inflation-adjusted rate of return, including gold, real estate, low-quality mutual funds, and stocks.
This is also the reason that market research consistently finds that the younger generations – especially the post-millennials – are investing less than their older peers. The reason is self-evident: most post-millennials are either students or freshers in the industry. At a stage of life when one finds it difficult to set aside a portion of salary as savings, it is unlikely for post-millennials to have the additional capital to indulge in long-term investments. However, this does not imply that younger generations are wary of investments by nature.
Research shows that compared to millennials and pre-millennials, post-millennials are more inclined to begin investing at an earlier age. In other words, it is the income and not the age that determines who invests and when.
This fact became amply apparent during the pandemic-induced shift to remote working.
Investing smaller amounts in equity markets
Indians typically invest lesser amount in share market (usually under 10,000 per month). The number of people investing in equity market in markets such as the USA is substantially higher (about 60-70 percent) while in India it is barely about 5 percent. Indians are more comfortable in taking leverage over home but not investing in equity. For instance, Indians believe it is more judicious to invest Rs 20 lakh in a home to avail a loan for 4 times the value of loan. Banks in India are also more encouraging towards this. But nobody takes Rs 20 lakh loan to invest in equity! It sounds more intelligent on the surface to invest Rs 20 lakh of saving to buy a home of 1 crore while in equity market, Indians usually have an average portfolio of 50,000. Given the asset-liability the risk and thereby the leverage that most Indians in equity market is non-existent.
The COVID factor: The rise of a new class of real estate buyers
The pandemic marked the entry of a new class of investors: millennials and post-millennials. The WFH professionals of this demographic found greater opportunities for savings, allowing them to think about investing in areas they were holding off until now. A 2020 report by NoBroker.com found that 82 percent of customers wanted to buy property in 2021, with millennials (20-40 demographic) accounting for 63 percent of the total real estate customer base in the country.
This shift is being driven by the need for more spacious homes amid the rise of remote working and the imminent hybrid work culture. With workers no longer required to commute to the office every day, the proximity to the workplace is no longer a determining factor in the home-hunting calculus of home-seekers. Instead of looking for expensive accommodation near the workplace, remote workers are free to look for housing options that align with their needs, preferences, and sensibilities at a more affordable price point.
This is why many young homebuyers are looking for properties in the suburbs and the city outskirts. Modern bachelors, couples, and families alike want homes that can accommodate work-from-home as well as study-from-home requirements of the family members. These requirements include a separate, private room for each member along with spaces for relaxation and other recreational activities. This movement is also being enabled by favourable government policies and discounts offered by discerning developers and builders. According to a recent survey of builders by NoBroker.com, 75 percent of the respondents admitted to offering discounts to attract homebuyers. A whopping 85 percent of them said that the discounts resulted into sales.
The need for financial security and stability
Another factor that drove young professionals to invest in property was the realization of the need for financial security amid the pandemic-led disruptions. Physical assets, especially real estate, can serve as an ideal financial safety net as it can be used as collateral in times of distress while also enjoying the potential of yield appreciation. With the complete overhaul of consumer habits in the immediate aftermath of the pandemic, it was only a matter of time before other new classes of investors started joining this group.
Besides financial security, physical asset ownership also brings with it a sense of status, which is an important factor for people when making future plans especially involving marriage and family. This is one of the reasons that everyone in India from the lower middle class to the elite class holds – or aspires to hold – some physical assets such as gold bangles, earnings, property, etc.
The needs, requirements, and sensibilities of the average Indian investor are critical when it comes to asset allocation, portfolio construction, and investment strategy. Considering the present trends, it is safe to say that the investment objectives of the majority of Indian middle class will be tied to physical investments in the interest of financial stability and security – rather than high return generation – for the foreseeable future.
The author, Amit Agarwal, is co-founder and CEO at NoBroker.com. The views expressed are personal
First Published: IST