How ‘financialisation’ of household savings will boost managed funds industry to $3.8 trillion by FY27

Financialisation of household savings, which got a leg up after the demonetisation of the Indian currency in 2016, is set to get onto an elevated stage in the medium term.

In simple words, financialisation is the shift in the traditional preference for physical assets such as real estate, gold and bank fixed deposits to investment in financial assets.

As a result of higher financialisation over the past five years, the managed funds industry in the country will likely grow assets under management (AUM) to around Rs 315 lakh crore, or $3.8 trillion, by fiscal 2027, an analysis by CRISIL MI&A Research indicates. As of last fiscal year, this figure was at Rs 135 lakh crore, or $1.6 trillion.

More than the absolute amount, the trend indicates how financialisation is picking up speed.

As of the year ended March 2022, AUM of the managed funds industry amounted to 57% of India’s gross domestic product (GDP). This proportion is going to increase to 74% in the next five years.

Directed efforts at financial inclusion, digitalisation, a longer-term trend of rising middle-class disposable incomes, and government incentives on these instruments have better channelled these savings to the industry. With rising inflation, households, too, are seeking higher returns than fixed deposits can offer, according to CRISIL.

To be sure, the trend has been supported by buoyant debt and equity markets on the back of excessive liquidity of the last few years. But as monetary policy is tightened and it sucks out some of the liquidity it could disrupt the financial markets.

The underlying factor is the pace of technology and intermediation in driving product penetration. In the future, development of a distributor segment through sufficient incentivisation to expand their network will be key to increasing both penetration and financial awareness in the hinterland.

Parallelly, the industry would need to move from awareness to education. At the same time, having directionally similar taxation and regulation would send out a more coherent message, helping investors take better-informed decisions based on their risk-return profiles rather than spend time grappling with various complexities, according to the rating and research agency.