India’s Burgeoning Middle Class & Wealth Management

Thanks to the economic liberalization program launched by former Prime Minister PV Narasimha Rao in 1991, the Indian economy, breaking away from its much ridiculed Hindu rate of growth of 3-4% per annum, could move upward with an average annual growth of 7% for the last 25 years. And wealth in the country has been growing at a higher rate than the global average for almost a decade.

This has not only lifted hundreds of millions of Indians out of poverty but also created a massive middle class. According to Deutsche Bank Research, the size of the middle class in India has doubled to 600 million by 2015. The report also states that the household savings rates also tripled between 2005 and 2015. A recent study of McKinsey Global Institute suggests that if India continues to grow at the current rate of growth, its economy would become the world’s 5th largest consumer economy by 2025.

There is, of course, a flip side to this development: Research reports indicate that income inequality in India is at its highest level since 1922: that India’s richest 1% hold 58% of the country’s total wealth. We have today 2% of the world’s millionaires and 5% of its billionaires. And if the black money that is in circulation in the country, which is alleged to be pretty high, is taken into consideration, inequality levels might go up to alarming levels.

Regardless of the data pertaining to the growth of middle class in the country and its flip side, what now matters most is: profiting from this rise in disposable income of India’s swelling middle class, for that is what brings in entrepreneurial capital which is essential for sustaining the growth phenomenon over a longer period. But historically, investment culture is said to be poor in many emerging markets. And perhaps, India is no exception to this feature.

Intriguingly, it is reported that hardly 12% of investors in India seek help of a financial adviser while investing their wealth. This phenomenon is found to be more pronounced in the case of younger lot, for they are found to prefer to take the Do-it-Yourself route. True, investment being made easy today by technology, almost anybody can invest on their own, but it certainly does not mean that everybody should, for investing is not everybody’s cup of tea.

This phenomenon becomes evident particularly during the periods when markets are doing very badly or very well. During such high volatility periods, investors are found to react in a knee-jerk fashion. It is in such situations that a financial adviser can, by hand holding investors from getting jittery in a falling market or from getting greedy in a rising market, lead them to safe zone.

Secondly, cognitive biases—illusory superiority—play a critical role in investment decisions. And interestingly, even professional fund managers and financial advisers are often found caught up in this trap. But then, fund managers operating under the umbrella of a large pool of researchers of their parent body that screens stocks, first by using a variety of metrics, including return and standard deviation and then qualitative screening by meeting the CEOs of respective businesses, could beat this trap and deliver results to the clients. 

So, the need of the hour is: the incumbents of new middle class must learn the basics of investment so that they could ask the right questions to the financial advisers and understand their answers rightly so as not to get carried away by their ‘jargon’ and instead influence the wealth manager to take right decisions vis-à-vis the personal goals of the investor and their accomplishment in a set time frame. Importantly, they must understand the difference between reaction- and response-driven decisions in the field of behavioral finance. A reaction is after all instant, unconscious and often is a defence mechanism, while a response-driven decision takes into consideration the present and future wellbeing of oneself and one’s family. So, investment decisions taken as a response to one’s future selves rather than reacting with emotions will ensure effective wealth management. 

Going forward, to harness the wealth potential of the newly emerged middle class for India’s economic future, what is needed now is a robust investment industry—wealth management/investment management firms—that caters to the needs of the neo-rich middle class. Importantly, as the first-time investors look for empathetic advice from the wealth managers rather than mere identification of profitable investment avenues and estimates of probable returns, human investment skills, both at the institutional and individual level, will play a vital role in expanding and sustaining the investment management