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Economy 05-Oct, 2024

Indian households see record net financial wealth surge, driven by shift to riskier assets

By: Shantanu Bhattacharji

Indian households see record net financial wealth surge, driven by shift to riskier assets

Equity and investment funds now account for 28% of total financial assets in the first quarter of FY25, marking a new record. (Photo Courtesy: AdobeStock) 

Although financial assets have increased, household debt has not seen a similar rise, remaining stable relative to pre-pandemic levels. This stability in debt, along with the growth in assets, has boosted the overall net financial wealth position.

The net financial wealth of Indian households surged to an unprecedented 115.9 per cent of the country’s gross domestic product (GDP) in the quarter ended June 2024 (Q1FY25), according to a research report by Motilal Oswal. The rise in wealth highlights a robust growth in household financial assets post-pandemic, while household debt has remained largely stable compared to pre-pandemic levels. 

Key Highlights: 

  • Record high in gross financial assets:

Household gross financial assets peaked at 157.9 per cent of GDP in Q1FY25, surpassing the previous high of 152.9 per cent recorded in Q4FY21. This growth represents a substantial increase from the pre-pandemic level of 123 per cent of GDP, indicating a consistent trend of asset accumulation among households. 

  • Stable household debt levels:

Despite the rise in financial assets, household debt has not seen a similar jump, maintaining stability relative to the pre-pandemic period. This stability in debt, alongside growing assets, has contributed to the strong net financial wealth position. 

More significantly, the rise in household financial wealth reflects increased savings and investments, which could have a positive impact on long-term economic stability. However, it also emphasises the need for continued monitoring of household debt levels to ensure balanced financial health amid rising wealth. 

Notably, the financial landscape for Indian households has undergone significant shifts, as mentioned in the research report. Household financial liabilities were stable at 42 per cent of GDP in Q1FY25, while household debt reached Rs 127 lakh crore, up from Rs 106 lakh crore in Q4FY23. This reflects a post-pandemic rise in absolute debt levels, although the ratio to GDP is consistent compared to the pre-pandemic average of 35 per cent of GDP.

Key trends in household financial assets: 

  1. 1. Shift in asset composition:

Household financial assets include currency, deposits, equity and investment funds, insurance, and pension funds. 

The composition has shifted, with equity and investment funds taking a larger share, while traditional assets such as currency, deposits, and insurance have seen a decline. 

  1. Surge in equity and investment funds:

The share of equity and investment funds has climbed to 28 per cent of gross financial assets in Q1FY25, marking a record high. This is more than double its share from a decade ago. 

This growth is attributed to the strong performance of the equity market in recent years. Despite this surge, the household sector’s stake in India’s overall equity market has remained relatively range-bound between 18 per cent and 22 per cent since FY16, standing at 21.5 per cent in Q1FY25. 

  1. Decline in deposits and currency holdings:

The share of deposits, including small savings, has dropped to 38 per cent of household gross financial assets, down from about 50 per cent in the FY10-FY14 period. 

The share of currency holdings has also declined to just 7 per cent, which is only marginally higher than its level immediately after the 2016 demonetisation. 

  1. 4. Drop in insurance funds:

The share of insurance funds has fallen to a 17-year low of 13.4 per cent in Q1FY25, reflecting a decline in preference for this traditional form of asset accumulation. 

  1. 5. Rise in pension and provident funds:

The share of pension and provident funds has risen steadily over the years, surpassing 10 per cent for the first time in FY20 and stabilising at this level since then, compared to 7.5-8.5 per cent during FY07-FY15. 

Implications for financial stability 

Increased risk appetite: The shift towards riskier assets such as equities suggests growing investor confidence but also heightens exposure to market fluctuations. 

Declining preference for traditional savings: Reduced holdings in deposits and insurance indicate diminished interest in traditional savings, driven by low returns. 

Need for financial education: With the rise in complex financial products, the focus should be on financial literacy to ensure portfolio diversification and mitigate market risk. 

The evolving asset composition suggests a growing appetite for riskier investments like equities, driven by strong market performance. At the same time, traditional savings options are losing appeal. While this trend can boost long-term returns, it also emphasises the need for financial education and portfolio diversification to mitigate potential risks in a fluctuating market environment.

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