A journey towards ‘financial freedom’

Parvatha Vardhini C | Updated on August 16, 2020

The expansion of investment options over the decades has enriched investors, even if savings in financial assets are still low

From small savings schemes and bank deposits to mutual funds options, bonds, insurance, and retirement products such as the NPS (National Pension System), there have been several choices for the Indian investor since independence.

Debt options get savvy

Post office savings banks were born in 1882, almost a decade after the Government Savings Bank Act was passed in 1873. After independence, the Government Savings Certificates Act of 1959 and the Public Provident Fund Act of 1968 paved the way for small savings plans. Since then, these schemes have proved immensely popular with fixed-income investors: collections rose from Rs 108 crore in 1948-49 to Rs 8.28-lakh crore in 2019-20. The sovereign guarantee on small savings products has been a big draw. And even the migration from fixed returns to quarterly rate resets (based on market rate movements) in recent years has not dimmed the schemes’ popularity. The introduction of newer products (Senior Citizens Savings Scheme and Sukanya Samriddhi Yojana) has also helped.

Alongside, banks have been at the forefront of mobilising savings since their nationalisation in 1969. Interest rates of 10 to 13 per cent across most tenures of deposits in the 1980s, as well as the 1990s, were enticing. However, the rationalisation and deregulation of rates rendered double-digit assured returns on term deposits history. However, options for potentially higher returns expanded for those willing to take higher risk.

Corporate and finance company deposits widened the choice, though some went belly up. Other products such as non-convertible debentures and tax-free bonds found takers. Debt mutual funds emerged as an alternative to fixed deposits (in terms of returns and tax efficiency), although in recent times, a few have suffered on account of defaults by corporates on the papers held by fund houses, impacting investors’ returns.

Market-linked products

On August 31, 1957, the ‘Native Share and Stock Brokers Association’ was recognised as the Bombay Stock Exchange (BSE). Over the decades, stock market trading has come a long way, catalysed by the introduction of derivatives and commodities trading and the ascent of mutual funds. Starting with a few players in the 1990s (UTI, SBI, and Kothari Pioneer), the

mutual funds industry has 44 players today and assets under management of about Rs 26-lakh crore. Investors willing to embrace market risk for higher returns have been well-served by well-chosen mutual funds, which have become more investor-friendly over time, with heightened transparency and rationalisation of costs.

Over the past two decades, NPS has emerged as a popular retirement savings vehicle, in addition to the Employees Provident Fund and pension plans of insurers and mutual funds. In recent times, tax breaks on NPS investments have rendered them more attractive.

Insurance offerings widen

The government’s move to nationalise the insurance sector in 1956 saw the LIC emerge as an insurance behemoth. But the perceived need for competition to improve efficiency of the only two players in the insurance space (LIC and GIC) opened the door to private players, who brought in innovative products and better customer service. The establishment of the Insurance Regulatory and Development Authority of India (IRDAI) in 1999 enhanced policyholders’ confidence.

Over the years, life cover options have grown from plain-vanilla term policies and traditional endowment plans to guaranteed return products and ULIPs, which offer market-linked returns. Product flexibility was enhanced by the introduction of riders, and the debut of online plans helped keep costs reasonable. The IRDAI additionally stepped in to rein in mis-selling and worse with ULIPs.

Innovation in health policies started in 2010-2011, which served to open up the market to newer groups, including senior citizens and diabetic patients. Today, insurers offer policyholders who maintain good health rewards by way of lower premiums.

More to be tapped

Yet, savings in financial assets are still low in India; investors tend to prefer physical assets such as land, house and gold jewellery/coins. The most recent data on household savings shows that the net financial assets of Indian households account for only 7.7 per cent of GDP as of 2019-20. As of March-end 2020, at least half of all household financial assets were held in commercial bank deposits, and about 23 per cent in life insurance funds; only 7 per cent was in mutual funds. Clearly, investment options may have expanded, but there’s still miles to go.

(With inputs from Rajalakshmi Nirmal)

Published on August 14, 2020

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