CashNews.co
An IIT Madras professor and a respected voice in financial education has raised concerns about a common misconception taking root in Indian households. Speaking on a podcast hosted by Financially Free, Dr. M. Pattabiraman stressed on what he considers a dangerous money myth: the belief that increasing equity exposure guarantees higher returns.
“People are acting as if the market party will never stop, which is scary,” Pattabiraman said, cautioning that such behavior could have severe consequences when the bull run inevitably ends.
Pattabiraman, known for his expertise in mutual fund analysis and investment risk, emphasized the need for balance in investment portfolios. According to him, the assumption that higher equity exposure always results in better returns is flawed.
“For the average investor, 50 to 60% equity is sufficient. A robust fixed-income portfolio is crucial for stability when markets decline,” he advised, underscoring the importance of diversifying investments to mitigate risk.
The current bullish equity market has indeed led to a significant rise in household wealth, as noted by analysts at Motilal Oswal Financial Services (MOFSL). They estimate that the financial net worth of Indian households has surged to 116% of GDP in Q1 FY25, up from 88% before the pandemic. This growth has been driven by increased investments in equities, with listed equity holdings now accounting for up to 28% of household financial assets, according to MOFSL analysts—a dramatic rise from 11.1% in March 2023.
However, Pattabiraman’s concerns are rooted in the behavior of investors who, emboldened by high returns, are overexposing themselves to equity. “I see people switching funds just because one gave a 15% return and another 25%. They act like these returns will continue forever,” he warned.
When the market inevitably cools down, it is the fixed-income investments—often ignored—that will provide the safety net, he stressed.
Motilal Oswal analysts also point out that while equity investments have bolstered household wealth, this rise has coincided with a sharp increase in household debt, much of it fueled by unsecured personal loans. Household debt-to-GDP ratio has climbed to 42% in Q1 FY25, up from 36.5% pre-pandemic. These loans, some of which have flowed into stock market investments, add another layer of risk, particularly if equity markets take a downturn.
Despite the current equity-driven wealth accumulation, history suggests that this upward trend may not last forever. The Reserve Bank of India (RBI) has noted that during the early days of the pandemic, a decline in the stock market led to a 3% drop in household financial wealth. A similar market correction could have a comparable effect on household net worth, further validating Pattabiraman’s concerns.
While Indian households have embraced equity investments post-pandemic, their growing exposure to unsecured debt and reliance on continually rising markets could prove dangerous. Pattabiraman’s advice is clear: balance is key. As he cautions, “When the market party ends, it’s your fixed-income investments that will save you.”