Economy
From Gold To Stocks A Major Transformation But Are Indian Households Taking On Too Much Risk In The Equity Market? Here’s What We Found
A silent revolution took hold in India in the challenging years following the onset of the COVID-19 pandemic. While a virus disrupted global economies and reshaped societies, a “financial bug” began spreading among Indian middle-class households—a newfound enthusiasm for equity market or stocks investments.
Traditionally, if one were to look at the investment pattern, Indian households have preferred parking their wealth in low-risk assets such as gold and real estate. In 2023, property accounted for 51% of household wealth, while gold represented 16%.
However, investments in equities, though still relatively modest, have grown dramatically—from 2.2% of household assets in 2013 to 4.7% in 2023. And this shift is visible in the soaring number of retail investors.
At the end of March 2020, only 31 million individuals were registered to trade on India’s National Stock Exchange (NSE). By March 2021, however, this had surged to 40 million, and today, over 90 million unique accounts are registered. Nationwide, stock trading accounts have nearly tripled between 2019 and 2023, from 41 million to 140 million.
Rising Household Equity Exposure
For the first time, official data is providing a clearer picture of household (HH) exposure to equities. According to recent reports by the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI):
–Indian households directly and indirectly hold about 30% of the country’s equity market capitalization (₹134 trillion as of Q1 FY25). This includes 21-22% directly and 8-9% through mutual funds.
–Equities and investment funds now account for 28% of HH gross financial assets (GFAs), up from 17-18% in 2019 and just 12-13% pre-2015.
–Household debt has risen from ₹40 trillion in 2015 to ₹127 trillion in Q1 FY25, nearly doubling since mid-2019. Despite this, the leverage ratio (debt-to-GFAs) has remained stable at 26-30% over the past decade.
Comparative Insights
Globally, Indian households appear less conservative than often assumed including direct and mutual fund investments, they hold 30% of India’s equity market capitalization—a figure comparable to Japan but higher than France (20%) and Britain (23-24%). However, it lags behind Canada (70%), Germany (over 50%), and the US (53-54%).
Interestingly, post-pandemic, India saw the biggest improvement in household financial net worth (FNW) among major economies. FNW rose from 89% of GDP in 2019 to 116% in Q1 FY25, a nearly 30% jump.
But as the equity market becomes an increasingly significant part of household financial portfolios, are Indian households overleveraged in the stock market?
While the growth in financial wealth is encouraging, gaps in data present challenges in assessing the full picture, to put into perspective
–Unlisted Equity: Current estimates exclude unlisted and other equity holdings, which could be significant.
–Non-Institutional Debt: Informal borrowings still account for 20% of household debt, a figure excluded from official debt estimates.
–Non-Financial Assets: There are no reliable estimates for real estate and other non-financial assets, which remain major components of household wealth.
Before we answer the question in its entirety, lets look at what explains the dramatic shift in Indian investment behaviour?
Surely, the transformation of Indian middle-class investment habits—from traditional savings in gold, fixed deposits, and small savings schemes to an enthusiastic embrace of equities—has been nothing short of remarkable. Four key factors have driven this shift, fundamentally altering the country’s financial game.
1. The Power of Digital Infrastructure
India’s digital revolution has played a key role in democratizing access to equity markets. Over the past decade, the country has witnessed an extraordinary expansion of internet access, supported by government initiatives that streamlined financial processes.
Opening a bank or trading account, once a cumbersome task taking days, can now be completed in minutes. India’s friction-free digital payments ecosystem enables instant money transfers, making investing in equities as easy as a few taps on a smartphone.
This florurishing digital infrastructure has made it possible for millions to step into the world of investments with ease and confidence.
2. Pandemic-Induced Financial Awakening
The COVID-19 pandemic served as a financial wake-up call for many Indian households. With no large-scale furlough schemes or stimulus checks to cushion the economic blow, individuals were forced to reevaluate their financial strategies.
Equities became a natural choice for those seeking higher returns. Platforms like Groww and Zerodha simplified the process, allowing first-time investors to enter the market with minimal effort. Zerodha, for example, saw its customer base grow from 1.3 million pre-pandemic to nearly 10 million by the end of 2022.
Infact, the unprecedented enthusiasm led Karthik Rangappa, Zerodha’s head of education, to remark, “I don’t think India has seen this kind of enthusiasm in equities [before].”
3. Years of Mutual Fund Awareness
The seeds of equity investment had already been sown by years of mutual fund advertising campaigns. Initiatives like “Mutual Funds Sahi Hai” (mutual funds are the right choice) established equities as a legitimate path to wealth creation.
Between 2009 and 2020, assets under management in mutual funds tripled, and they grew by an additional 33% in the next three years. For many investors, experimenting with individual stocks and other equity products was a logical next step after starting with mutual funds.
4. Market Performance and Economic Optimism
A short-lived market downturn during the pandemic was followed by a robust recovery, spurred by India’s impressive GDP growth and the narrative of the country’s unstoppable economic rise.
In January 2024, India’s stock market surpassed the Hong Kong Stock Exchange to become the fourth-largest globally by market capitalization. This performance, coupled with a growing domestic euphoria about India’s future, has kept investors motivated.
Now to answer the question, are Indian household overleveraged in the equity market?
While the surge in retail investor participation is encouraging, it has raised concerns among market regulators and analysts.
For industry insiders, the biggest concern isn’t just a market correction but the potential long-term impact on first-time investors. A bad experience in the markets could deter them from returning, leading to a significant setback in the growing investment culture.
Finance Minister Nirmala Sitharaman recently spoke about this shift in investment behavior. She noted that the middle class is diversifying its portfolio beyond traditional avenues like post office savings and fixed deposits, seeking better returns through equities and property investments.
“Today, small savings alone do not comprise the portfolio anymore,” she said. “People are finding different portfolios for better returns.”
However, there are some concerns –
Overvaluation: Many public companies are perceived as overvalued, posing risks of sharp corrections.
Small-Cap Concerns: The Securities and Exchange Board of India (SEBI) has cautioned against piling into less-liquid small-cap stocks, which can lead to volatile swings.
Social Media Influencers: The rise of social-media “finfluencers” has created unrealistic expectations among new investors, further fueling speculative behavior.
Between November 2023 and January 2024, 58 million new investors registered with the National Stock Exchange (NSE), a record-breaking influx that exceeded even the peaks during the pandemic.
Moreover, while financial wealth has risen, it is unclear if this has led to a tangible “wealth effect”—a boost in household spending that could drive broader economic growth.
The Last Bit
Indian households are undoubtedly embracing equities like never before, challenging their traditionally conservative approach to savings. However, questions about the sustainability and risks of this trend still persist.
A comprehensive understanding of household balance sheets, including unlisted equity and real estate, is critical to gauge whether this financial shift will lead to long-term economic benefits or potential vulnerabilities.
Hence, for now, while the rise of Indian retail investors is a story of optimism, it still warrants careful monitoring as the market registers its many ups and downs.
