Tips for Financial Planning
by Mayank Bhatnagar
The long-awaited shift of household savings from physical to financial assets is gradually beginning. The average Indian household’s tendency to funnel its savings into physical assets—gold and real estate, has been diminishing and the growing trend suggests that financial assets have started gaining more popularity amongst investors.
Physical Assets – a tumbling asset class
Physical assets accounted for more than two-thirds of household savings in 2012-13, up 48%, from five years earlier. Low interest rate regime and economic stimulus (post 2008 financial crisis) by various countries were one of the most important factors for people moving towards this asset class. With the financial markets in a turmoil and availaibility of abundant liquidity, real estate and gold turned out to be the most attractive investment avenue for investors. In India, the story of these asset classes reversed when the inflation in the Indian economy started heading northwards. With inflation touching almost 11% at the consumer level in 2012, the central bank had to intervene and began the upward rate revision cycle. This resulted in a liquidity squeeze and hardening of interest rates. The returns in real estate and gold started tumbling. With inventory levels in real estate rising and resultant demand coming down, there was a downward correction in the prices of property in most major real estate markets. As things stand, the future outlook for the real estate does not look very positive considering the lack of demand in the market. As per analysts, it could take anywhere from 2 to 3 years for real demand to pick up in the real estate sector and recovery to set in.
In the international markets, gold prices fell to a five-year low earlier this week to $ 1,077 per ounce. In India, gold prices sharply fell to Rs.25,020/- per 10 grams. Investors and jewellery buyers fear that prices haven’t bottomed out because of the forthcoming interest rate hike by the US. In the near term, there is unlikely to be much support for gold prices because of rural distress and a slowing economy in China. (China being one of the largest consumer market of Gold in the world) A report by the World Gold Council said total demand for gold coins and bars during the January-March 2015 quarter contracted at 6% year-on-year. It said gold investment demand is down to a six-year low and “positive returns generated by domestic equity markets proved an attractive alternative to gold’s investment appeal, particularly at a time when there were no obvious catalysts to give the gold price clear direction”.
The case for Financial Assets
The channeling of investible surplus into financial assets like Mutual Funds, Direct Equity and Term deposits has been evident in the last few months.
As per recent estimates, an amount of Rs. 1.22 lakh crores have been added to Mutual Fund assets in the first 6 months of the calendar year. This is a 20% increase than the corresponding period of the previous year. With total industry AUM (Assets under Management) crossing Rs.12 lakh crores, outlook for owning financial assets looks bright. The equity market has also seen higher retail participation post the rally of May 2014. Further estimates suggest that the equity market would remain bouyant for the next few years with the economy shaping well and showing signs of recovery.
This shift from physical savings to financial savings isn’t just visible in equities alone. In this fiscal year so far, banks have collected Rs. 2.65 trillion in term deposits, up 55% over the same period a year ago. This return to term deposits is owing to a fall in inflation and the central bank’s unwillingness to cut interest rates by much: savers are enjoying positive real yields on their deposits after a long time.
With returns on physical assets diminishing, there would be further investor interest generated towards the financial asset classes. As long as financial assets continue to deliver higher yields/ returns, savers would move away from physical assets, and would explore more wealth creation ideas by investing into long term financial assets. This would be positive for the markets as domestic inflows in the financial markets would be able to offset any outflows triggered by international events like the Greek crisis or the US Fed Reserve raising rates.
Written by Mayank Bhatnagar (Chief Operating Officer at FinEdge Advisory Private Limited)Tags: gold, Mutual Funds, physical assets, Real Estate