Wisdom of crowds, shared

Altogether, the industry’s size has grown over 13 times to

Rs 21,139 crore. (Yes, this data does look out of order, but it is not the entire mutual fund industry but only investments in shares and debentures, through mutual funds, that the report is talking about.) While investors have benefited from the returns that equities have been providing over the past three years, the 29 asset management companies and its 41,000 strong army of distributors have raked it in — they make more money from selling equity funds than debt.

Delivering a return of 73.7 per cent, the Sensex during the past 12 months has outperformed all major and minor country indices, except the Russian index, by extremely large margins. But even as the value of the Sensex rose to record-breaking highs, its underlying value, the PE ratio, rose by a third to 20.9 in end-March, showing resilient corporate performance. This makes it the world’s third most expensive market, after Japan’s 36 and Russia’s 22.5. Commanding a market capitalisation of more than Rs 30 lakh crore, it matches India’s fast-growing and equally-ranked (world’s second fastest) GDP.

Is there a trend? Yes, but only if you go beyond the short term, and examine the same numbers over the past 15 years. Since 1991 there have been four instances when rises in the Sensex and increase in household savings in shares and debentures have come together. The converse is true as well — four times have they fallen together. Meaning, more than half the time, there is a direct positive correlation between the rise in the Sensex and movement of household savings towards equities. If you take a one-year lag, which means household savings enter or exit equities after one year of the Sensex rising or falling — an assumption based on anecdotal observation of investor behaviour — the trend stands strong.

When you look at the numbers from the other risk-free side — that is from savings in bank deposits — we meet the same results. Half the time whenever the Sensex rose, money in banks fell and vice versa. With a one-year lag, the correlation increased marginally. Which shows that perhaps the saving and investing habits of Indians are not as illogical as the fast-growing financial services industry would have us believe.

Studying this data, I would put half my money on the intuitive knowledge of Indian householders. For they’ve done the right thing half the time. For instance, if the industry that’s celebrating AUMs (assets under management) today were to go back to when liberalisation began with Manmohan Singh’s 1991 budget, the present 3.8 percentage point increase pales before the winds of time.

For, the biggest jump came in FY 1992, when the Sensex (for this study I’ve taken the average Sensex value over the financial year) rose 84 per cent and the share of household savings in equities jumped 9 percentage points to its highest-ever 23.3 per cent — repeat, 23.3 per cent, a figure that has never been reached again. The technology-led boom of FY 2000 followed, when a 41 per cent rise in the Sensex saw household savings rise by 5.2 percentage points to 7.7 per cent.

Despite this year’s increase, the big picture tells us that Indian savers have a long way to go before they are able to benefit from the coming long-term bull run of the Indian economy. To simply reach the 1992 level, savers will have to increase their equity allocation by 18.4 percentage points. And then some. Perhaps many savers are investing directly in stocks and IPOs, a statistic that’s not recorded in this data set but, when seen through the hyper-jump in the number of new depository accounts opened during the past three years, shows up loud and clear.

Bank deposits, which have seen their returns rise over the past two years, remain the No. 1 destination of a risk-averse nation. Here, the allocation has never fallen below 25 per cent, though the 25-47 per cent band is fairly volatile. Backed by higher salaries, Indian households last year more than balanced their increased risk by saving with banks, which rose 10.3 percentage points to 46.7 per cent.

What I’m unable to comprehend is the losers — small savings (down 7.2 percentage points to 12.3 per cent), insurance (down 1.8 percentage points to 14.2 per cent) and provident and pension funds (down 2.9 percentage points to 10 per cent). In an atmosphere of high risk the natural balancing of asset allocation should have been these three instruments. (PF and small savings are “safer” than bank deposits.) Perhaps it’s the lock-in these instruments demand that has pushed savers away from them towards banks.

I usually don’t subscribe to the wisdom of crowds, but the intuitive logic of Indian householders is compelling me to bow before it. For, how many fund managers do you know who in the past 15 years have outperformed the market more than half the time?