Published on: 13 September, 2019

Amidst the gloom & doom of the economic downturn, we continue to see weekly inflows from small town India into Marcellus’ funds. More generally, equity inflows into mutual funds are holding up as are insurance premiums written by even third rung insurers. Our trips to small towns suggest that such flows point to a broader shift taking place in the Indian economy.

“We find several attributes of Indian households that are exceptional in the international context. Importantly, these distinctive features of Indian household balance sheets cannot be explained by differences in the demographic characteristics, wealth, or income of Indian households relative to their counterparts in other countries…A large fraction of the wealth of Indian households is in the form of physical assets (in particular, gold and real estate). This is unusual in the international context, and especially unusual for younger households, and for households in the bottom 40% of the wealth distribution, i.e., those with the lowest amounts of gross assets…Over the coming decade and a half, the elderly cohort is expected to grow by 75percent. Only a small fraction of this cohort has saved in private pension plans. Moreover, a large segment of the population of households in all age cohorts has not actively taken steps to insure adequate financial coverage during retirement. The need to finance adequate consumption during retirement is therefore a looming issue, and when combined with the low penetration of insurance, households appear particularly vulnerable to adverse shocks later in life.” – Report of the Household Finance Committee, RBI, July 2017 (Source: https://rbidocs.rbi.org.in/rdocs/PublicationReport/Pdfs/HFCRA28D0415E2144A009112DD314ECF5C07.PDF

The visitor from Haryana…
A month ago an elderly doctor from a small town in Haryana came to our office. A paediatrician in his early-60s, the doctor explained that the real estate crash of the past five years had dented the value of his landholdings. Hence around three years ago he had invested in a small-midcap PMS offered by a prominent asset management house in Mumbai. The small-midcap correction of the past couple of years dented that portfolio as well. Then the doctor had stumbled upon the two books we have written based on Rob Kirby’s Coffee Can Investing principle. He had come to our office in Mumbai to know whether we could help him compound his life’s savings.

…represents a generational shift in SME savings
The doctor from Haryana is representative of a broader trend. As we travel around India, we see that in small town India owners of SME businesses have understood the devastating implications of not being able to retire with a large enough corpus. In particular, they have figured out that their property & gold will not be enough to fund them through retirement. The RBI’s remarkably well researched August 2017 Household Financial Committee report says that 95% of Indian households’ stock of wealth is in physical assets. As most people now realise that physical assets struggle to keep up even with the rate of inflation, SME owners are first turning their black money savings into white money by paying Income Tax (as attested by the growing number of Income Tax payers even in the sluggish economic climate). Then they are searching for providers of financial savings products who can give them steady compounding. As a result, in this economic downturn, equity inflows into mutual funds are holding up as are insurance premiums written by even third rung insurers (you can check out the data on https://www.amfiindia.com/mutual-fund

The practical implication of this trend is that the smaller the town, the quicker the SME owner warms to Marcellus’ offering. So, using Tamilnadu as an example, a pitch which takes an hour in Chennai, takes 45 minutes in Coimbatore (population: 1.6 million), 40 minutes in Tirrupur (population: 0.8 million) and around 30 minutes in Erode (population: 0.5 million). There are several reasons I believe for this pattern (which we have seen in Maharashtra as well):

  • The financialisation of savings has happened to a certain extent in big cities like Mumbai, Delhi, Bangalore and Chennai. In smaller cities, most SME owners have only a smattering of financial assets (usually fixed deposits and Life Insurance Company policies).
  • The market for residential property and land still has some liquidity in the big cities – at least a few flats are being bought and sold in cities like Mumbai and Chennai. In smaller cities, the market for real estate is completely frozen solid. There have been no deals all year long in several of the smaller cities we have visited.
  • The audience which meets us in the bigger cities tends to have a greater proportion of people from white collar professions – people who have a steady income and hence a greater sense of security. In the smaller cities, the audience is overwhelmingly SME owners who have to live by their wits eg. textile traders, spice traders, car dealers, local real estate developers. These people have to live with volatility in their day job and hence crave the security that comes from investing in a relatively predictable financial asset.


Investment implications
If India’s per capita income – which is around US$2000 today – grows at 5% per annum (which is what it has done in the last 10 years) over the next 10 years, the country’s per capita income will be around US$3,300. As­suming a population of 1.5 billion, this gives India a US$5 trillion GDP ten years hence. Assuming further that our household savings rate will stay at broadly 20% a decade out gives us annual household savings of US$1 trillion. At present, roughly half of household savings in India are in financial assets (the rest is in physical). If this ratio persists, then a decade out, annual household savings should be around US$500 billion in India.

However, such a figure ignores the balance sheet shift that we highlighted in the opening paras of this note. As SME owners realise that they need to save more through financial rather than physical savings, they will start selling their real estate to invest in financial assets. The question is at what rate will this shift take place? As per RBI data, presently 95% of Indian wealth is in physical assets. If this number drops by 1% point per annum (which is what our reading of the Credit Suisse World Wealth Yearbook suggests) then that implies that around $100 billion per annum could get added to the annual flow into financial savings.

With potentially $500 billion of financial savings arising from annual income and with potentially another $100 billion arising from the balance sheet shift (from physical to financial), our back-of-the-envelope estimates suggest that the annual flow into financial savings could triple over the next decade (from US$200 billion today to US$600 billion). That in turn makes it imperative that the country figures out how not just how to give Indian savers a fair deal but also how to harness these savings ideally at a national level. That in turn takes us into the whole debate on how the ongoing “formalisation” of the Indian economy can be managed in a less disruptive manner.

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Saurabh Mukherjea is the author of “The Unusual Billionaires” and “Coffee Can Investing: the Low Risk Route to Stupendous Wealth”.

Note: the above material is neither investment research, nor investment advice. Marcellus does not seek payment for or business from this email in any shape or form. Marcellus Investment Managers is regulated by the Securities and Exchange Board of India as a provider of Portfolio Management Services and as an Investment Advisor.

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