Knowledge is power. It is not a cliché. If you are serious about creating legitimate wealth for yourself, there is a new exciting learning curve ahead. When newspaper headlines scream that India’s economy grew at 7.2 per cent in the quarter to December 2017, you know it means something for your future economic well-being. However, to figure out the impact on your money, you need to connect a few dots. In India, when people get mone y i n hand, they tend to buy gold. When they get richer, they move their money from gold to real estate.
That is it! There is no significant allocation to financial assets. However, as the education levels rise in households, people tend to take fixed deposits, insurance policies and mutual funds. This is not an assumption. It is published in a comprehensive household finance behaviour research by the Reserve Bank of India last year. Those who sell mutual funds or insurance policies agree that whenever they try speaking about financial assets, people tend to shut themselves off. They believe ‘finance’ is a complex subject. They will not invest in something that they do not understand.
While it is the financial service provider or the industry’s responsibility to spread awareness, it is also the responsibility of individuals to be aware. The inertia to know more means that there are only 1.49 crore unique mutual fund investors in India, according to the data from Association of Mutual Funds in India. There are barely 2.5 crore people holding a demat account. It means only these people are enabled to invest in the stock market directly.
A lot of stockbrokers say that a majority of their retail account holders barely use their demat or trading account. This is barely scratching the surface. The benefit of India’s economic growth can reach individuals only when they participate. The Sensex and Nifty may touch record highs over the next few years and not benefit anyone who stays out. That brings us back to the 7.2 per cent GDP growth reported by India in the quarter to December 2017. That makes India the fastest growing large economy in the world ahead of China. Most pundits believe that India has the potential to grow at this rate or even higher for a long time to come.
If that happens, it means a lot to investors now and for those looking to invest in equity markets. A high economy growth induces investment from businesses. They expect demand for goods and services to grow in line with the economic growth. They invest ahead of the actual growth in demand and expand their factories or businesses. This allows them to meet the high demand generated when it happens. The government releases quarterly economic growth data represented by gross value added or GVA in percentage terms.
This is considered as the economic growth rate. A key number tracked by financial analysts is gross fixed capital formation (GCFC). It is the net increase in physical assets in the economy. The growth in GCFC was reported to be 12 per cent in December 2017, the highest in five quarters. It is an indication that there is a buildup of new assets in the economy. Companies depending on India’s economy are those in the infrastructure sector, consumer goods, banking and financial services among others. You may want to discuss your investment plan with your financial advisor and buy shares of companies that are expected to benefit due to India’s economic growth in the long-term.
As a mutual fund investor, you may want to pick up schemes that own these companies. Yet again, your financial advisor will be happy to help you identify them. Investing is not a one-way traffic. It needs as much effort from you as anyone who wants to enable you to invest. A recent example will help you understand the connection between economic growth and stock markets. When India’s economic growth was soaring at 8-10 per cent between 2004 and 2008, share prices surged sharply. When the global financial crisis hit markets around the world, share prices tumbled across markets.
Global growth slowed and India’s growth too slumped to below six per cent. Over the past few years though, the global growth is showing signs of a turnaround. Stock markets around the world are rallying. In India, share prices have remained near a record high despite measures like demonetization. As the economy comes to terms with the goods and services tax or GST, the government expects stable indirect tax revenue. Since share prices today reflect tomorrow’s profits, the message is that there is money to be made for businesses in the future. (The writer is Publisher and Founder at Simplus Information Services Pvt Ltd).
KEY DATA TO LOOK FOR
It is important to look for economic growth data represented by gross value added and gross fixed capital formation.