How India invests: Risk Hai to Ishq Hai (Part 2 of 4)

This is the second of a four part essay. You can read the first part here. In this series, I explore if states of India have investor personalities. And specifically, in this part, I look at the states who are over/under allocated with respect to equities given their income levels.

The first part of the essay was a lot of Gyaan - just to set up the context (and maybe as a bait for Sopranos fans). Now, we dive deep into some original insights and observations made by me.

Now, let us get on to more serious stuff…

I take 21 states of India (and Delhi) which have a population greater than 25 million. Then I try to explore if these states too have investor personalities.?

• How does their allocation to Equities, Term Deposits and Gold vary, when adjusted for income effects??
• Are some states more geared towards riskier investments than others?
• What explains this behavior? And is there a comparable case study outside India?

I first divide the states in my dataset into five buckets.?

• Convergent States: GDP per Capita < National Average; Growth in GDP > National Average (Uttar Pradesh, Madhya Pradesh, Assam, Rajasthan, Odisha)
• Laggard States: GDP per Capita < National Average; Growth in GDP < National Average (Bihar, Jharkhand, Chhattisgarh, West Bengal)
• Rich Southern States: Andhra Pradesh, Karnataka, Telangana, Kerala, Tamil Nadu
• Outliers: These are highly urbanized states and/or legacy financial centers. Delhi, Maharashtra, Gujarat
• Rich Northern States: Punjab, Haryana

How do we compare the investment appetite of states for different asset classes??

I consider four kinds of assets:

• Direct Equity holdings: As proxied by equity market investors per 1000 people by state
• Equity Mutual Fund Investments: As proxied by AUM per capita by state
• Term Deposits: Average retail term deposits
• Gold: Average gold holdings per household

This part of the essay will deal with my observations on investment behavior for Direct Equity holdings and Equity Mutual Fund Investments

Who loves risky stuff?

Now, we can't compare investment appetite across states for equities unless we take into account the differences in income levels between them.? The next two charts show the first two of these metrics regressed against State GDP per Capita.

There is a clear message at the first glance when you look at these charts - the richer a state, the greater the participation and investment in risky assets (equities and equity mutual funds). But there is much more beyond the obvious. And also precisely the reason why I introduced the bucketing of states earlier in this essay

The fun begins when we start looking at the outliers to the regression line in these two charts

The True Outliers

Delhi (DL) and Maharashtra (MH) lie far above the curve. Which is not surprising given that 3 of the top 5 regions in terms of the number of investors (Delhi-NCR, Mumbai and Pune) lie in these states.? Furthermore, while the numbers for other states are attenuated by rural areas, where familiarity with financial investments is lower, that is not so with Delhi. NCT of Delhi has a 92% urban population (~3x national average) and a GDP per capita >2.5x that of the country

Risk Hai to Ishq Hai

The next to catch the eye is Gujarat (GJ). A state where equity market holdings are significantly above the line relative to its income levels. But amusingly enough, it is also a state that invests slightly less, relative to its income levels, into equity mutual funds. One part of the puzzle can be verified. Ahmedabad is the second largest city in terms of equity market turnover in the cash segment (after Mumbai). It outranks Delhi, Kolkata, Hyderabad and Bengaluru. Other cities, much smaller in population terms - Rajkot and Vadodara- also make up the top 20 list on the same parameter. Does that translate into a (relatively) lower propensity to park their funds into equity mutual funds for people in this state?

Risk, yeah? But everything looks good in limits, no?

Now let us look at the gray and blue dots in the charts above. Nearly all the Rich Southern and Northern States, relative to their income, lie below the line - whether you look at equity market holdings or equity MF investments. Kerala (KL), Tamil Nadu (TN), Haryana (HR) and Telangana (TG) seem to be significant undershooters, when it comes to the investors’ appetite in these states towards risky assets

We have nothing to lose but our own fears

Convergent States (all in the North) present another interesting aspect. Specifically, Convergent States like Uttar Pradesh (UP), Madhya Pradesh (MP), Assam (AS) and Rajasthan (RJ) are all over-indexed relative to their income levels, when it comes to equity investments (direct as well as through MF route). Odisha (OD) seems to be an outlier, remaining under-indexed relative to both types of risky assets.

I will stop here. And let you think about what makes some states more open to equity investments over the others. Does the hypothesis that some states have investor personalities also gel with your personal experience?

In the next part, I will talk about how some states are over-allocated to less risky investments like term deposits and gold.

Finally, a request.

I don't know how LinkedIn will evolve. But I suspect that deeper, original writing is more likely to get lost in the mass produced content from creators on this platform too.

I have a day job, which pays me good enough. And a work life balance that gives me time to reflect. My motivation to write is to become a better thinker. If you like these pieces, consider subscribing to my Substack here.