In the past decade, especially post-pandemic, the number of Indians investing has risen considerably. In October, 30 lakh new demat accounts were opened, with the total hitting a record 21 crore. Many more are investing in mutual funds, with more than Rs29,000 crore coming into the equity market via systematic investment plans (SIP) alone. Many are buying gold, picking up bonds and also exploring alternative assets.
Sachin Jain, managing partner at Scripbox, notes that investors have sensed the need to diversify beyond traditional instruments like fixed deposits.
“Markets have expanded as awareness has improved, which has been aided by digitisation and the introduction of new players that have brought the product distribution to a new level,” he says.
Yet, data suggests that many Indians aren’t doing enough. The Indian Wealth Survey published earlier this year by Marcellus Investment Managers in collaboration with Dun and Bradstreet showed 43 per cent of HNI respondents were saving less than 20 per cent of their post-tax income. Only a third had more than 20 per cent equity allocation and 14 per cent didn’t maintain any emergency funds.
Another study by YouGov and Edelweiss Life Insurance highlighted that, despite 94 per cent of respondents engaging in some form of financial planning, 64 per cent relied on credit to meet short-term expenses, while 49 per cent dipped into savings.
This is where financial planning becomes crucial. “Once you have clarity about your future goals, financial planning will assist you in creating a structured approach to achieve them. It brings peace of mind, knowing that your aspirations are backed by a sound financial strategy,” says Jain.
Financial planning brings discipline and commitment to the process of investing, says Roopa Shankar, director, Vithadwaitha financial services. “Not only will it help in managing liquidity requirements better, but it will also help in the right choice of assets and better risk management,” she says.
Experts say that one should invest in liquid funds when the time horizon is short, or pick equity schemes if looking at long-term goals. The growing SIP book is a reflection of the financial planning approach of many Indians, says Shankar. However, even today, less than 10 per cent of people invest in equity, she adds.
Financial planners say it is important to invest across asset classes to minimise risk and pick certain asset classes like equity to maximise returns. One also needs to give investments time to compound over time. For instance, if you invest Rs1 lakh in an equity mutual fund and keep it for five years, assuming it grows at 12 per cent CAGR, it would be over Rs1.76 lakh in five years. But, if you stayed invested for 15 years, it would grow to Rs5.47 lakh.
Rule of 72
If you divide 72 by the rate of interest you are earning, it will tell you the time your corpus will take to double, says Jain. So, if your rate of interest is 12 per cent, then your corpus will typically double in six years. But do note that markets are not linear and there are ups and downs. Interest rates also fluctuate. Therefore, investments need time.
Shankar says financial planning is more important in today’s unpredictable job market. “It is important to bucket your short-, medium- and long-term commitments and requirements. It is also essential to review your investments on a regular basis to adjust your changing needs,” she says.
An analysis by Shankar shows that if you had started a Rs10,000 per month SIP in a large-cap or a broad equity fund, and the best fund delivered a 15 per cent CAGR return over a 30-year period, your investment value would have grown to Rs4 crore. Even taking the worst fund, which delivered 9 per cent CAGR return, the value of your SIP would have grown to more than Rs1.20 crore.
“The Indian investor has realised that he needs to diversify across asset classes,” says Shankar. “While equity funds have been the preferred choice for aggressive investors, hybrid funds (which invest in equity, debt and commodities and thus help manage volatility) are gaining importance, which reiterates the fact that investors have also learnt to manage risks.”
This year, when gold prices were surging, strong inflows were seen in gold ETF (exchange traded funds) and gold mutual funds. Last quarter, while equity markets were volatile, hybrid funds saw strong inflows, a signal of how investors have increasingly started to plan and manage their investments.