Crisil Report - Big Shift in Financialisation - vrk100 - 19Dec2022

Crisil Report - Big Shift in Financialisation

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Crisil Limited, an S&P Global company, has come out with a report on financialisation trends in India. The report named 'Big Shift in Financialisation' highlights the trends of financialisation in India in the past five years, that is, between March 2017 and March 2022.

The report says savings in the country are being channeled beyond simple bank fixed deposits to risk assets via portfolio managers through investment vehicles, like, mutual funds, portfolio management services (PMS), alternative investment funds (AIFs) and life insurance. 

Financialisation is a process whereby investors move away from traditional / physical assets, like, real estate and gold towards financial assets, such as, mutual funds, insurance and PMS. 

Financial assets being managed by India's investment industry (Crisil reports terms it as 'Managed Investments Industry') have grown from Rs 63.3 lakh crore in Mar2017 to Rs 135.0 lakh crore in Mar2022, showing a compounded annualised growth of 16.4 percent. 

 

Investment industry in India includes, life insurance, mutual funds, retirement funds (such as, provident funds and NPS or National Pension System), PMS and AIFs. 

Reasons for increased financialisation in the past six to seven years include: efforts for financial inclusion, increased digitisation, rise in middle-class disposable incomes and government incentives (like, tax benefits) for the financial instruments. 

Increased awareness among youngsters and penetration of mobile apps for easy investing following lower broadband prices have also nudged investors toward financial assets. 

Between 2018 and 20222, savers have suffered steep drop in interest rates (for bank deposits, etc.), which forced investors to look for alternative avenues, like, stocks and mutual funds. All these have contributed to increased share of financial assets in household savings.

Pronab Sen, former chief statistician of India, talking to CNBC TV18 on 17Dec2022 on the Crisil report says, "The move by savers from bank deposits to other financial assets, such as, stocks, mutual funds, insurance and PMS, is a threat to economic growth. Funds are moving from a fungible (bank) kitty -- that lend money to a whole range of entrepreneurs, from small and medium enterprises to large corporates -- to a thin layer of capital markets from which only large corporates can access money. The result is more money is being funneled to a smaller group of large entities. Insurance companies and mutual funds provide equity capital only to a select group of companies via IPOs or initial public offers."

 

Of the managed investments industry, investors are shifting more towards equity products as compared to debt products. The share of equities in investment industry increased from 24 percent in Mar2017 (Rs 15.3 lakh crore of Rs 63.3 lakh crore) to 31 percent in Mar2022 (Rs 41.6 lakh crore of Rs 135.0 lakh crore).

Among the financial assets, bank fixed deposits remain the most preferred financial instrument in the country, though their share has declined over the years, with investors moving towards capital market instruments.

In aggregate, the investment industry with Rs 135 lakh crore of assets has grown at a faster pace of 16 percent CAGR in the past five years (2017-2022) compared with bank deposits, which grew from Rs 108 lakh crore in Mar2017 to Rs 170 lakh crore in Mar2022, clocking a 10 percent CAGR in the same period.

The Crisil report lauds India's asset management companies or AMCs (mutual fund industry) for playing a pivotal role in increasing financialisation in India. 

 

Table 1:  Growth of Managed Investments Industry 2017-2022 >

 

Table 2: Share of Managed Investments Industry in GDP (gross domestic product or national income) > 

PMS, AIFs, EPFO and NPS

 

Over the past decade or so, there has also been a sharp rise in investor flows into big- ticket capital market instruments such as alternative investment funds (AIFs) and portfolio management services (PMS).

 

As shown in Table 1 and 2 above, India's managed investments industry is dominated by life insurance, followed by mutual funds and provident funds. However, in the past five years, alternative investment funds have been growing at an annualised rate of 50 percent though their share in GDP is only 6.4 percent (Mar2022).

 

Assets under NPS rose to Rs 7.36 lakh crore as of Mar2022, clocking 33.7 percent compound annual growth rate (CAGR) over five years. Within this, the share of the private sector rose to 20 percent (from 12 percent in Mar2017). 

Alternative investment funds (AIFs) and portfolio management services (PMS) require minimum investment of Rs 1 crore and Rs 50 lakh respectively. Increasing formalisation of labour sector is contributing to higher growth of assets under management (AUM) of PFs and NPS. 

EPFO and provident funds manage their assets through PMS. Provident fund money accounted for over 80 percent of the PMS industry as of March 2022. It is expected to retain this share and drive growth of the segment over the next five years as the economy gets formalised and more people get employed in the organised segment. Other investors in PMS are high networth individuals (HNIs).



The minimum investment amount required for PMS is Rs 50 lakh. While this amount is less than the minimum requirement for AIFs – Rs 1 crore – the PMS investors pay the whole amount in a single tranche, while AIF investors pay the same in different tranches as and when the capital is called. 

 

Employee Provident Fund Organisation (EPFO) started investing in Indian stocks through the exchange traded funds (ETFs) route in Aug2015. This too has boosted not only the investment industry growth but also the stock market performance.

Going Forward

 

The Crisil report forecasts the managed investments industry will grow from the current Rs 135 lakh crore (57 percent of GDP) to Rs 315 lakh crore (74 percent of GDP) by Mar2027, showing a CAGR of nearly 19 percent. 

 

However, it is worth noting financialisation of savings and its increasing flow into the managed investments industry has been backed by buoyant debt and equity markets fuelled by excessive liquidity. Any prolonged disruption in the financial markets or liquidity conditions may have an impact on investor experience in future.  

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References:

Tweet 19Jun2021 - FM Chidambaram initiated EPFO into investing in Indian stocks via ETF route  

 

Tweet 15Oct2022 - economic reforms are a continuum

 

PIB press release 26Jul2017 - investment pattern of EPFO funds in ETFs

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Disclosure:  I've vested interested in Indian stocks and other investments. It's safe to assume I've interest in the financial instruments / products discussed, if any.

Disclaimer: The analysis and opinion provided here are only for information purposes and should not be construed as investment advice. Investors should consult their own financial advisers before making any investments. The author is a CFA Charterholder with a vested interest in financial markets. 

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He blogs at:

https://ramakrishnavadlamudi.blogspot.com/

https://www.scribd.com/vrk100

Twitter @vrk100

How to Choose Insurance Wisely?-VRK100-26Sep2013

Dear all,

The other day, on a sweltering afternoon, I was ambling through the crowded markets of Dadar West in Central Bombay, which offers all kinds of merchandise to people from all walks of life; irrespective of their income levels. You can buy just about anything from these bustling bazaars which offer a variety of products and services, right from provisions, fresh vegetables, fruits, meat/fish, jewellery, watches, eatables, photography, eateries, electrical goods, domestic appliances, furniture, to ready-made garments and so on. You can get some great bargains also here. The interesting thing about Dadar West market is that it is suitable for consumers with all kinds of budgets.

As I was jaywalking through the pavements, amidst jostling crowds, literally rubbing shoulders cheek-by-jowl with other shoppers, I found some plastic sheets in various hues strewn all over the sidewalk. Looking at them closely, I gathered that the sheets were covers for several gadgets, like, refrigerators, washing machines, television sets, mixers, grinders, etc. We Indians have a particular liking to cover each and every gadget, thing or appliance with a cover, be it plastic or cloth. We buy covers for our suitcases and for our mobile phone handsets, cars, two-wheelers, etc. Car owners, including those of C and D-segment cars, never remove the plastic covers from their seats in their cars, even two or three years after buying it! No doubt, living in a tropical country nearer to the Equator with the Sun beating down vertically, we need to protect our goods from heat and dust. May be, it is a curious case of Indians overdoing it. In some houses, I’ve have seen ladies protecting their Godrej wardrobes/almirahs too with covers!

But when it comes to basic covers that are very vital in our lives, we seem be utterly unaware of the consequences of not having those important covers. One typical case is the bravado exhibited by motorcyclists on our bumpy roads without wearing any crash helmet. And then there is this most vital cover, that is, insurance cover – insurance cover for the lives of earning members of the family. Of course, we don’t do any insurance for our household articles also, that’s a different issue altogether.

Here is an engaging conversation one had in a local train with a young man in his mid-30s:

HP: “Hi, Vishal, how’re you?”

Vishal: “Fine, and what about you and where are you coming from?’

“Fine, thank you, Vishal. I’m just coming from Nariman Point after attending a seminar on life insurance there.”

 “Okay, how was the seminar?”

“It was good. How is life and what about your folks?”

“Life is good and my family are also doing well.”

“Okay. By the way, how much insurance cover do you have?”

“(rolling his eyes) Mmm…I pay some thing like Rs 65,000 to Rs 70,000 for my insurance policies every year.”

“I’m not asking you about the insurance premium you’re paying, what I want to know is what is the total sum assured of your policies.”

“(after scratching his head for a few minutes…) I think I’ve got four polices – money back and ULIPs – and total sum assured is around Rs 3 lakh.”

“You’re paying a premium of Rs 70,000 for a total cover of Rs 3 lakh!”

“Yes, HP, that is right.”

“Vishal, do you think the amount of insurance, that is Rs 3 lakh, is enough for a man like you working for a good company in Bombay?”

“I’m getting good income tax deduction for the premia I pay every year and I get good sums regularly from my money-back policies.”

“It’s correct that you get IT deduction, but the total insurance cover may not be sufficient for your insurance needs.”

(silence for some time)

“As you’re working for a good company, I suppose your annual salary will be around Rs 4 lakh, right?”

“Yes, it comes to around Rs 4.5 lakh.”

“Your annual income is Rs 4.5 lakh, but your insurance cover is only Rs 3 lakh. Do you think it’s enough to protect your family members if anything happens to you?”

“(making some murmurings and feeling sweaty in local train where we’re packed like sardines, he finally admitted) I don’t know, you tell me how much insurance I need.”

“It depends on several factors – like your age, annual income, family obligations and needs, liabilities, dependent parents/siblings, future inflation, future needs, medical history, and others. But since your family obligations are limited and you don’t have big liabilities, I can tell you one thumb rule, Vishal.”

“What’s that?”

“In general, an earning member of a family requires a life insurance cover of about 10 to 12 times his/her annual income. This is only a ballpark amount. If one is having a house loan of, say Rs 15 lakhs, one’s insurance need will go up by that amount since he/she can’t afford to pass on their loan liability to other family members.”

“(shocked with disbelief) Ten to 12 times, that’s too much insurance!”

“Yes, it’s true. Why I tell 10 to 12 times is: Suppose a person with an annual income of Rs 5 lakh insures for, say, Rs 60 lakhs. If the person dies, the family will get that Rs 60 lakh sum assured from the insurance company and they can earn an annual interest of around Rs 4.80 lakh at an average of 8 per cent return. And that money will be sufficient for making a decent living for the surviving members of the family.”

“I can’t afford to pay so much amount of premium.”

“I think you can definitely afford it, provided you opt for the cheapest insurance policy.”

“What’s that?”

“It’s pure term insurance policy offered by several good insurance companies in India with the lowest premium. Pure term insurance policy is basically bought for protecting your loved ones.” 

“What would be the premium of that policy for my age?”

“For a 35-year old male with normal health, for a term insurance of Rs 60-lakh sum assured and for a term of 25 years, the annual premium will be around Rs 20,000 – the cheapest from an insurance company among more than 20 insurers in India. The most expensive one will be Rs 33,000 per annum from a big insurer.”

“(raising eyebrows with excitement) Is that only Rs 20,000? But, I’m paying Rs 70,000 premium for only Rs 3 lakh sum assured, why is that?”

“Because, there is lot of mis-selling. All  your policies are money-back and ULIPs and their premia are very high. Insurance agents usually sell policies that fetch them highest commissions. In case of ULIPs, agents get up to 40 per cent of the annual premium as commission in the first year itself. While buying, you ask your agent the amount of commission she gets from your policy.”

“(looking perplexed) Forty per cent commission, is it true?”

“Yes, it’s correct. You’ve to compare various life insurance companies’ policies before opting for a specific policy. Pure term insurance plans are the cheapest and recently their premium rates have come down substantially due to reduction in solvency margin by the insurance regulator.

“In fact, IRDA, the insurance regulator, has permitted the insurance companies to sell insurance policies online at lower premium and a few insurers have started selling term insurance policies online – with the premium being one of the lowest.”

“Is it really, can I buy term insurance policies online?”

“Yes, you can, of course. But, it’s always better to consult your certified financial advisor unless you are an expert on insurance matters. After that, you can take a decision depending on your individual needs and can buy that policy online.”

“By the way, what’s the return I get from this pure term insurance policy?”

“Nothing!”

“(utterly shocked) I don’t get any return?”

“No, you don’t get any return from the term insurance policy if you survive the policy term. It’s similar to your car insurance. You just pay and forget. Only if anything untoward happens to the insured, his/her family will get the full sum assured.”

“(shaking his head vertically and horizontally) Mmm…Why I should invest in this term insurance if I don’t get any return?”

“Good question, Vishal. Insurance is separate and investment is separate. Don’t club them together. As I told you earlier, for a total cover of Rs 60 lakhs, you pay a premium of only Rs 20,000 per annum.

“But, if you opt for an endowment, money-back or a whole-life policy or ULIPs, you’ve to pay something like, Rs 2 lakh to Rs 5 lakh premium annually, which is more than your annual income!”

“(shrugging off his shoulders) I need to get some returns on my investment, nah?”

“Basically, you need to keep insurance and investment separate. First, buy term insurance very cheaply and the remaining amount you can invest in high-yielding equity mutual funds which are likely to fetch you a return of up to 12 to 14 per cent over long-term.”

“Are returns from equity MFs guaranteed?”

“No, they’re not. Going by their track record in the last 15 years in India, I’m telling you this. But, if you are risk averse, you can still invest the amount in a PPF account or other safe/guranteed instrument, which may fetch you returns between 8 and 11 per cent depending on your tax bracket.”

“Okay, HP, can you tell me some good policy for my child.”

“You mean child insurance? Why does your child need insurance?”

“(not knowing what to answer) Huhhh…so many policies are being offered… I’ve seen several ads on billboards, TV and in newspapers.”

“Well, life insurance needs to be done on behalf of the breadwinner in the family – the insurance cover should be for the life of the breadwinner and not for the child. So that, if anything happens to the earning parent, the child get protected and receives the sum assured.”

“I will require money when my child goes for higher education.”

“I entirely agree with you, you need money for your child’s higher education. After taking adequate basic pure term insurance covering your life, as I told you about 10 to 12 times of your annual income; you can consider a child insurance plan provided your savings permit you to buy that child insurance plans.”

“There are some child plans available in the market that cover the life of the child.”

“Yes, there are. That doesn’t mean you buy them. The parent does not incur any financial loss, so it’s not necessary to take policies that cover the life of the child.”

“But, how do I ensure that I save some money for my child’s higher education or, say, marriage?”

“As I told you, first take pure term insurance covering your life; then you can opt for some money-back or endowment child insurance plans that protect the life of the earning parent, but not the child. Or, you can opt for a combination of pure term insurance and equity mutual funds with long-term regular investments.”

“Which life insurance companies are offering child insurance plans?”

“Almost all the life insurers in India are offering these policies. You can consult your certified insurance advisor, she can suggest you good policies depending on your individual specific needs. But, one thing I can tell you please don’t buy ULIPs, as they are highly expensive, non-transparent and you end up paying hefty commission to agents.”

“Thank you, very much, HP!”

“Thank you, Vishal. ”

As the local train reached Bandra station, I got off from it and strutted off toward my downtown BKC residence taking on the nice skywalks built recently by the local authorities for pedestrians.

 Picture courtesy: Google

Note: This is a repost of what I posted earlier in December 2009, but it's still relevant.

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Disclaimer: The author is an investment analyst, equity investor and freelance writer. This write-up is for information purposes only and should not be taken as investment advice. Investors are advised to consult their financial advisor before taking any investment decisions. He blogs at:

http://ramakrishnavadlamudi.blogspot.in/

http://www.scribd.com/vrk100

Connect with him on twitter @vrk100