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Indian retail investors should adopt a staggered approach now

comment Updated: Oct 26, 2013 07:34 IST

In the normal course of events, the trends in a country's equity markets should mirror the real economy. Backed by a sharp rise in foreign portfolio inflows in the last two months, the Bombay Stock Exchange's benchmark Sensex is again set to first reclaim and then canter past the peak it had run up three years ago.

Indians last year saved more than Rs 2 lakh crore. Less than 15% of that went into financial savings of which only a tiny fraction - 3.1% - went into the stocks the rest of the world has been chasing.

Real estate and gold, traditional investment avenues in the subcontinent, and less vulnerable to sudden capital flight, continue to attract the bulk of Indian households' savings. This rent-seeking inherent in the Indian approach to investment needs to be curbed.

More than four out of 10 adults in India still do not have a bank account - a statistic that tellingly brings home the importance of financial inclusion in India's development strategy.

In its conventional definition, financial inclusion means making available banking services at an affordable cost to low income, marginalised and disadvantaged groups of people.

As banks were forced to open up branches in remote areas, after their nationalisation in 1969, India's savings and investment rate rose steeply from 13% to 23%. Higher investment feeds into growth and by the early 1980s India was able to put the embarrassing Hindu rate of growth of 3-3.5% well and truly behind. Pressing the accelerator on financial inclusion can possibly yield similar results now.

In these heady times, retail investors could do well with a bit of caution in money management. Buoyancy in stock markets does prompt people to take emotional decisions.

It is okay if one misses some bit of the rally. Financial planners advise, almost as a rule, caution while entering markets as exposure to risk is higher when one enters a rallying market.

A staggered approach to investing predicated on informed and well-researched decisions while shuffling around the savings portfolio is always a better idea. From an individual perspective the thumb-rule, investment experts say, is that you should park a lesser proportion of savings in equities as you grow older.

But, more importantly, every time the stock market scales a new peak we need to ask ourselves why more of our savings are not financial. The answer to that probably lies in India's financial inclusion, or rather the lack of it. Otherwise, the gains from the stock market will mostly go to the foreign institutional investors.