MFDs, AMC’s , Wealth Outfits,Next Generation Financial Advisors Gain from Abolishment of Indexation

 State wise traditional assets

You want Nifty to grow 30000 or 40000 and much faster right?

 

You want Indians to dilute physical asset holding from real estate ( 50% of the holding is in the investment format through household savings).

You want Gold (18% held by Indian households) to Diluted by the Indian household.

 

You want India to grow its Equity Allocation by Indian households from 5% to 45% like the U.S. economy.

 

You want to reduce FII’s dependency on the Indian market and that can happen when old physical assets find a pathway to exit.

 

You want the Indian economy to grow like China and you want Developed economies to invest in Indian capital markets.

 

The biggest benefit of the new Capital gain Tax Removal of Indexation benefit is none other than Mutual Funds, Its Distributors, Mutual Fund Asset Management companies, 400+ PMS and AIF Asset Management companies.

 

Current Asset Allocation:

Bank Deposits and Cash: These constitute half of the financial assets, with cash alone accounting for approximately 75% of the allocation to equities.

 

Household Assets Growth: From 2013 to 2023, total household assets have grown from Rs. 336 trillion to Rs. 914 trillion, representing almost a threefold increase.

 

Shift in Investment Preferences:

Indian households have traditionally preferred safe investments, favouring fixed-income generating assets and holding significant amounts of cash.

Recent years have seen a shift towards financial assets due to the financialization of savings, innovation in financial products, and disintermediation of financial services.

 

Current India vs. USA Asset Allocation:

In India, financial assets constitute about one-third of household assets, while physical assets make up two-thirds. ( Equity 5%, Real Estate 50% and Gold 18%).

In the USA, the reverse is true, with financial assets making up 70% to 75% of household assets and physical assets 2% 5to 30%.

 

Impact of Traditional Asset Allocation:

The traditional preference for physical assets and fixed-income investments has resulted in a drag of 1.5% in the 5-year portfolio CAGR, leading to a loss of approximately INR 55 trillion in investor wealth over the past five years.

 Future Projections:

It is expected that equity as a percentage of total household assets could double to 10% over the next 10 years, growing at a rate of 0.5% per year.

Private Wealth to National Income Ratio: This ratio has risen from 34x in the past to 5.5x currently, reflecting the growing wealth of Indian households.

 

Key Assumptions:

Nominal Growth: The nominal growth in INR terms has been 10.6% over the last 10 years and 12.8% over the previous 20 years. A supportive macroeconomic backdrop could sustain double-digit growth in nominal GDP, assumed at 11.5% CAGR over the next 10 years.

 

Strategic Shifts and Potential:

Equity Assets: The projected doubling of equity allocation could increase equity assets to approximately Rs. 300 trillion. Half of this growth is expected to come from the existing stock of equity, with the other half driven by a gradual shift from fixed deposits to equity.

Global Contribution: Currently, China and India together contribute 50% to global growth, with India's share at 16%, projected to rise to 18% by 2027.

 

Recent Performance:

Equities and Gold: Over the past four years, equities and gold have significantly contributed to wealth increase. India’s market cap has grown by over 80% in the past three years, with rising retail participation, while gold prices have risen by 65% from 2020 to 2024.

 

Market Position:

India’s equity market has overtaken Hong Kong to rank 4th in market cap, following the USA, China, and Japan. Professional Fund Management: Access to professional fund management services. Diversification was an emphasis on diversifying investments.

Investment in mutual funds and other equity products is accessible with feasible ticket sizes. Convenience and ease through digital investment platforms.

 

Future Outlook:

Significant inflows into the equity market are expected to accelerate the growth of equity holdings among Indian households from 5% to 10% by 2030.

 

As Indian households mature in their investment choices, they are encouraged to take adequate exposure to equities to leverage the India growth story and create wealth.

 

Conclusion

Aum of equity assets will grow. MFDs business and revenues will grow. The next generation of quality Financial Advisors will come into the market. Equity markets will attract more inflows and will reduce dependency on FII’s.  Rotation and circulation of capital within the economy will happen.  Ideal assets will find a pathway to exit.  GST and income tax revenue will grow which will lead to consumption growth.  Mutual Funds, SIPs are recommended for mitigating risks associated with equity investments and optimizing returns through disciplined, regular investments, benefiting from rupee cost averaging. Despite consistent growth in Mutual Fund AUM over the past decade, it is still only around 21% of bank deposits. Mutual fund folios represent just about 6% of bank deposit accounts, indicating significant potential for growth.

Don’t be surprised if you find your neighbour selling assets and investing in the Indian equity market.

These insights and projections underscore the evolving landscape of household investments in India, highlighting a gradual but definitive shift towards financial assets, particularly equities, driven by economic growth, financial innovation, and changing investor preferences. Well SEBI has given a path of coming up with Rs 10lakh products . Happy selling. You will find more jobs in financial sector, new wealth outfits, flood of Private Equity behind wealth companies since flood of money is coming into markets. Wealth outfits will make strategic planning for expansion and growth keeping the current policy frame-work. In AMC you will new products coming up and Passive AUM will grow signficantly.