Stock market returns drift away from traditionally safe assets: A study

According to a research paper by RBI economists, stock market returns have a weak link with the decision to invest in equity and mutual funds. But it is gradually influencing savers to move away from traditional safe instruments like fixed deposits and post office savings schemes.

A research paper titled ‘Determinants of Household Saving Portfolio in India: Evidence from Survey Data’ by Chaitali Bhowmik, Sapna Goyal, Amit Kumar, Rekha states, “Stock market returns have a statistically insignificant relationship with investment decisions in equity and mutual funds. Mishra, Preetika and Satyananda Sahoo. The views expressed in this article are those of the authors and do not necessarily represent the views of the Reserve Bank of India.

Stock market returns, represented by BSE Sensex returns, do not show any statistically significant relationship with assets such as share and mutual fund investments, the authors note. “Existing literature suggests that the relationship between stock market returns and stock market investment is not straightforward.”

But at the same time, the BSE returns, however, have significantly driven investment away from safe and traditional instruments such as fixed deposits and post office savings instruments in urban areas, the authors say, suggesting some substitution may be underway.

Interest rate on term deposits positively influences the decision to save in assets such as fixed deposits and post office savings while house prices have a mixed effect on savings in financial assets in rural and urban areas.

Empirical findings suggest that as household income increases, so does the likelihood of owning financial assets and maintaining a well-diversified portfolio. Furthermore, the analysis shows that business groups associated with high job security and regular income streams have a higher propensity to save and a higher proportion of risky financial assets in their portfolios.

At the macro level, despite an increase in annual savings (i.e., inflows) in financial assets, outstanding asset holdings (i.e., stocks) observed from various rounds of the All-India Debt and Investment Survey (AIDIS) Reflecting the primacy of physical assets, a disproportionately high share of household wealth is still allocated to physical assets such as land and buildings.

The authors acknowledge the limitations of the study due to the lack of availability of quantitative data. The study analyzes the determinants of household savings in India for the period 2014 to 2022 using ‘Aspirational India’ database of Consumer Pyramid Household Survey data of the Center for Monitoring Indian Economy (CPHS-CMIE) which contains qualitative data.