SAVING OPTION AND THEIR RELEVANCE TO INDIAN INVESTORS
Page 1 of 28
2014
"It's not how much money you make, but how much
money you keep, how hard it works for you,
and how many generations you keep it for." -
Robert Kiyosaki (author of ''Rich Dad, Poor Dad'')
2014
Sudiksha Joshi
Sanskriti School
5/27/2014
SAVING OPTION AND THEIR RELEVANCE TO
INDIAN INVESTORS

BACKGROUND :
"An investment in knowledge pays the best interest." - Benjamin Franklin
Investing is probably the most intimidating and daunting move that an individual makes, yet if fortuitous
enough, can turn yield terrific gains and turn a person from rags to riches. Benjamin Franklin rightly said
that investment without education and research will give regrettable outcomes, in a nutshell "losses".
Savings are crucial from the perspective of an individual / firm and equally important for the economy.
For an individual , it acts as an insurance and helps overcome the crisis situations. Moreover, savings are
prerequisite for growth and developmental works in the economy. Savings rate is considered to be the
main determinant of economic growth and development. Higher savings lead to capital formation which in
turn leads to growth thereby increasing output and employment. As per the latest findings , the sustained
growth of economy is possible only when there is increase in the propensity to save and invest.
This paper analyses the reasons for an individual to save & invest , pattern of savings, evolution of
financial market and behavior of an Indian investor.
Why should an investor save?
Saving money is crucial in securing our life from uncertainties and achieving our long-term financial
goals. In a world where almost everything is available only in exchange of money, buying essential
things in life and securing our future comes at a price. Many a times, living from paycheck to paycheck
leaves us with little additional cash to take care of our future needs. In such a scenario, inculcating a
habit of saving goes a long way in ensuring that all our needs are fulfilled.

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DIFFERENCE BETWEEN SAVINGS AND INVESTMENT
''In investing, what is comfortable is rarely profitable.'' - Robert Arnott
SAVINGS
• TIME: Usually meant for meeting
short term needs and are required
to deal with emergency situations .
• RISKS AND REWARDS: In certain
schemes are safe, offering negligible
or miniml interests over a time
period. For example: Fixed Deposit,
Savings Account.
• LIQUIDITY: Most liquid assets, can be
accessed anytime.
INVESTMENT
• TIME : Entails a long term horizon of
usually more than six months and
designed to provide returns and
growth of money.
• RISKS : Money invested in finncial
products are risky but have higher
potential to grow. Some assets
provide tax exemptions which
reduce tax liabilities and give long
term benifits For example: Mutual
funds, stocks, equity shares,
debentures.
• NOT LIQUID : They cannot be easily
sold and converted into cash; it takes
a few days for the money to reach
back to bank after selling the
investment product.

Investment decision making - a few basic principles:
Successful investing involves making choices that meet unique needs of present and financial goals of the
future. The personal circumstances of individuals will affect their decisions. Whether saving for a home,
retirement or children's education, the need is to strategize to enable money growth. Below are 6 investing
principles to follow:
• While safety is an important objective for many investors, a majority of
them invest for capital gains, which means that they want the invested
amount to grow. There are several options in the market that offer this
benefit. These include stocks, mutual funds, gold, property,
commodities, etc. It is important to note that capital gains attract taxes,
the percentage of which varies according to the number of years of
investment.
GROWTH
• While no investment is absolutely safe , however there are some
financial products which are preferred by investors who are risk averse.
Some individuals invest with the objective of keeping their money safe ,
irrespective of the rate of return they receive, on their capital. Such near
safe products include saving accounts, fixed deposits, government
bonds.
SAFETY
• Some individuals invest with the objective of generating a second source
of income. Consequently, they invest in products that offer returns
regularly like bank fixed deposits, corporate and government bonds, etc.
INCOME

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MONITERING THE PORTFOLIO AND ALIGNING THE INVESTMENT NEEDS WITH THE
TIME HORIZONS
5.One should examine the investment
portfolio with a financial advisor, or oneself
at least once a year to ensure that it
continues to meet the desired needs. Market
conditions, life events (marriage, children and
retirement) and changing goals are cues to
review the portfolio.
6.The type of investments one choose will
depend on whether saving for long-term or
short-term goals. For long-term goals, one
may want to consider growth-oriented
investments. For short-term goals call for
investments that are more conservative, and
more accessible. For example, if somebody is
investing to save for a down one would want
quick and easy access to your funds.
BUILD A DIVERSIFIED PORTFOLIO
3.At monthly or weekly basis at smaller
amounts than lump-sum deposit over a
longer time frame allows to choose when
and how often one makes contributions -
ensuring one makes investing a priority.
4.Spreading assets across a wide range of
investments is an effective way to reduce risk
and increase potential returns over the long
term. Holding a mixture of different types of
investments will help cushion portfolio from
downturns, as the value of some investments
may go up while the value of others may go
down.
KNOW ONESELF AND GET AN EARLY START
1.Strike a balance between risk and reward that
individuals are comfortable with for greater risk
offers wider opportunities which is appropriate
for one's investment time frame. Consider risk
tolerance, investment knowledge, investment
objectives, gross annual income, approximate
net worth and investment time horizons.
2.Compounding is money multiplying itself by
earning a return on the return. A compound
rate of interest ensures that one earns
interest on one's interest income too.

INVESTMENT & SAVINGS OPTIONS AVAILABLE IN INDIAN FINANCIAL MARKET :
S.
NO
FINANCIAL
ASSET
CAPITAL
PROTECTION
GUARANTEES LIQUIDITY TAX
IMPLICATIONS
RISKS ANY
OTHER
FEATURES
1 Post Office
Recurring
Deposit
Completely
protected as
its backed by
Indian
Government
Compounded
8.3% quarterly
Offered
despite 60
month
stipulated
lock in
No tax benefit
on savings /
income
Risk
free
Doesn't
require
commercial
credit rating
Not inflation
protected
Systematic
saving plan
of saving
small, finite,
equal sum
of money
each month
up to 5
Short-term goals Long-term goals
MEANING These are objectives that are less than five
years away, for which you'll need a
significant amount of money. For example:
Vacation
House down payment
Planned expenses
These are objectives that are five or
more years away. For example:
Extended travel
Medical expenses
Children's post-secondary education
Retirement
What to
invest in:
To save for the short term, consider investments
that are more conservative in nature and more
easily accessible.
To save for the long term, you should
consider a diversified portfolio which may
include a growth component.

SAVING OPTION AND THEIR RELEVANCE TO INDIAN INVESTORS
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years.
S.
NO
FINANCIAL
ASSET
CAPITAL
PROTECTION
GUARANTEES LIQUIDITY TAX
IMPLICATIONS
RISKS ANY
OTHER
FEATURES
2 Bank
Recurring
Deposits
Optional
insurance by
DICGC
Fixed interest
rate
guaranteed for
the duration of
RD
Liquid,
even if
depositors
default to
pay within
he
account
tenure
No tax
advantages as
interest on
maturity is
"income
earned from
other sources''
Risky
when
interest
rate
change
s. For
exampl
e: high
interest
rate for
the
same
time
due to
econom
ic
growth
Banks
can end
RD
account
before
maturity
Saves
predefined
sum of
money
every
month for
fixed tenure
MATURITY
PERIOD: 6
months-10
years
Earn better
interests on
svings than
on Savings
Bank
Account

S.
NO
FINANCIAL
ASSET
CAPITAL
PROTECTION
GUARANTEES LIQUIDITY TAX
IMPLICATIONS
RISKS ANY OTHER
FEATURES
3 Post Office
Recurring
Deposit
Completely
protected as
its backed by
Indian
Government
Compounded
8 .3%
quarterly
Offered
despite 60
month
stipulated
lock in
No tax benefit
on savings /
income
Risk
free
Doesn't
require
commercial
credit rating
Not inflation
protected
Systematic
saving plan
of saving
small, finite,
equal sum
of money
each month
up to 5
years.
4 Public
Provident
Fund
Completely
protected
Interest rate
on PPF
deposits is
8.7% p.a.
Offered
despite 15
year lock
in
stipulation
Tax deduction
on savings
maximum up to
Rs. 1 lakh
Risk
free
Long term
saving asset
Provides
security to
self-
employed,
old age and
workers in
unorganized
sector

SAVING OPTION AND THEIR RELEVANCE TO INDIAN INVESTORS
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S.
NO
FINANCIAL
ASSET
CAPITAL
PROTECTION
GUARANTEES LIQUIDITY TAX
IMPLICATIONS
RISKS ANY
OTHER
FEATURES
5 National
Savings
Certificate
Completely
protected
Interest rate:
8.5% on 5
years option
and 8.8% p.a.
on 10 year
option
compounded
half yearly
Offered
despite 5
and 10
years
stipulation
lock in
Tax deduction
offered to sum
of Rs. 1 lakh in
one year
Risk
free
No credit
rating due
to
government
backing
Not inflation
protected
Safe and
small
saving
asset with
tax sings
and
guaranteed
returns
6 Senior
Citizens
Saving
Certificate
Completely
protected
Interest rate:
9.2% p.a.
compounded
quarterly
Offered
despite 5
year
stipulated
lock in
Eligible for tax
deduction
Interest earned
on deposits is
taxable if
interest is
greater than
Rs. 10,000
Risk
free
Safe
investment
with
guaranteed
returns

S.
NO
FINANCIAL
ASSET
CAPITAL
PROTECTION
GUARANTEES LIQUIDITY TAX
IMPLICATIONS
RISKS ANY OTHER
FEATURES
7 RBI
Savings
Bond
Completely
protected
Interest rate:
8% p.a. on
this bond
Offered
despite 6
years
stipulated
lock in
Offers in
loan form
No
premature
encashme
nt
No tax benefit
on investment
and in interest
earned.
Interest earned
comes under
"Income from
other sources"
Risk
free
No credit
rating
Fixed and
assured
returns
Bonds can
be acquired
or through
cash in safe
accounts
which are
called "safe
bond ledger
accounts"
8 Rajiv
Gandhi
Equity
Savings
No protection
as capital is
invested in
equity market
Securities are
less volatile
and relatively
stable.
No
guaranteed
return
Liquid,
fixed lock-
in for one
year and
flexible
lock-in
period for
two years
after
finishing
first year
Can
change
securities
in portfolio
Tax deduction
up to Rs.
25,000
Tax benefit up
to deposit of
Rs. 50,000 only
Uncert
ain
capital
market
Poses
risk
with
stocks
and
equitie
s
No credit
rating
Not inflation
protected
Applicable
for first time
investors
with annual
salary up to
Rs.12 lakh
Can invest in
direct equity
from stocks,
mutual fund
schemes.

SAVING OPTION AND THEIR RELEVANCE TO INDIAN INVESTORS
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S.
NO
FINANCIAL
ASSET
CAPITAL
PROTECTION
GUARANTEES LIQUIDITY TAX
IMPLICATIONS
RISKS ANY OTHER
FEATURES
9 Mutual
Funds
No capital
protection.
Mutual funds
invest in
market
assets which
are
vulnerable to
losses
AMCs can
run Capital
Protection
Oriented
Funds which
offer high
proportion of
fixed income
securities
No guarantees Open-
ended
funds are
liquid i.e.
funds that
can
always be
invested
Closed-
end funds
are not
liquid i.e.
funds are
launched
for a fixed
period and
one can
invest in
them
during the
initial offer
Combines
the savings
of all
investors to
form a large
pool aaof
money which
is in turn
invested by
the company
on shares,
bonds and
other mutual
funds for
capital
formation to
generate
profit which is
given back to
its customers
as dividends
as profits
Not inflation
protected
No credit
rating
Offers
diversity of
funds with
various risk
factors, profit
potential and
fund
management

quality
S.
NO
FINANCIAL
ASSET
CAPITAL
PROTECTION
GUARANTEES LIQUIDITY TAX
IMPLICATIONS
RISKS ANY OTHER
FEATURES
10 Stocks and
Equities
No capital
protection
No
guarantees in
stock
investment
Extremely
liquid: no
lock-in
stipulated
time
One can
sell the
investment
any time
and get
back the
money
within 3
days if
customers
are willing
to transact
stocks
Dividends
aren't taxed
Capital gains
are taxed at
15% if stocks
are held for
less than a
year
0.1% tax
imposed on
each stock
during delivery
of transaction
called Security
Transaction
Tax
It’s the actual
share in a
company's
ownership
Not inflation
protected
No credit rating
Returns in the
form of capital
gains/ and
dividends

SAVING OPTION AND THEIR RELEVANCE TO INDIAN INVESTORS
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S.
NO
FINANCIAL
ASSET
CAPITAL
PROTECTION
GUARANTEES LIQUIDITY TAX
IMPLICATIONS
RISKS ANY OTHER
FEATURES
11 National
Pension
Scheme
Complete
capital
protection;
most safe
investment
option as its
government
regulated
No
guaranteed
returns
Liquid and
allows for
early
withdrawal
s
Tax deduction
on investment
up to Rs. 1
lakh
Amount
received at the
end (including
interest) is
taxable
No
guara
nteed
return
s
Gives pension
benefits to
employees in
private, public
sector, self-
employed who
can plan their
retirement by
enrolling in this
scheme
Not inflation
protected
No crating
rating
Least
convoluted,
simplest and
lowest cost
pension
system
12 Life
Insurance
Capital is
protected till
premiums are
paid ad
policy is
enforces
Sum invested
is guaranteed
Liquid,
depending
on policy
types and
tenure of
policy
enforceme
nt
Premiums paid
qualify for tax
deduction up to
Rs. 1 lakh in a
financial year.
Risk
management
tool that
protects
insured people
during
unforeseen
circumstances
Generally not
inflation
protected

Not credit rated
INVESTOR'S BEHAVIOR - ( A Theoretical Background )
According to economic theorists , investors think and behave "rationally" when buying and selling stocks.
Generally it is presumed that investor would use all the information to form a "rational" expectation in
investment decision making. In reality, investor do not think and behave rationally. On the contrary,
investor speculate between unrealistic highs and lows and are misled by emotions , subjective thinking
and herd mentality.
The main hypothesis is " Efficient Market Hypothesis " , on which most of the academic research is
based . There are three basic theoretical arguments that form the basis of the EMH. They are:
 Investor is rational.
 Everybody takes careful account of all available information before making investment decision.
 The third principle is that the decision maker pursue self interest.
Since stocks are always traded in stock exchange at their fair value, it is impossible for investors to buy at
deflated rates and sell at inflated rates. Hence, it's impossible for an investor to perform better than the
stock market through expert stock selection or market timing. Thereby investors can acquire higher
returns by purchasing riskier investments.
Nonetheless, resentment towards EMH exists. For example investors, such as Warren Buffett have
consistently beaten the market over long periods of time, which by definition is impossible according to the
EMH.
Behavioral Finance is an emerging science which studies the irrational nature of investors. Most of the
investment decisions are influenced to some extent by prejudices and perceptions that do not meet the
criterion of rationality. It explains how emotions and cognitive errors influence investors and decision
making process. These researches have show that investors across the markets not only behave
irrationally sometimes but also get influenced by heuristics, social affiliations, demographic factors and
psychological biases.

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Life Cycle Saving & Investment:
The Life-Cycle Hypothesis (LCH) is an economic theory that is apropos to the spending and saving habits
of people over the course of a lifetime. Its assumption is that humans consume in proportion to their
anticipated life income. For example, people save for retirement while they are earning a regular income
(rather than spending it all when it is earned).
Depending on the earning capability, age and the current level of accumulated wealth, investors are
broadly classified in one of the four stages of the life cycle: accumulation, consolidation, spending
(withdrawal), or gifting. According to the theory of Lifecycle investing, each individual will go through
various lifecycle stages, in which the investment needs are different.
Accumulation phase (Age Twenties and Thirties)
In the youth phase individuals can invest in higher risk assets and follow an aggressive investment
strategy, designed to provide maximum long term growth such as equities and mutual funds.
Consolidation Phase (Age Forties and Fifties)
In mid-life, people accumulate assets to cover the important needs like housing, children education and
marriage expenses and look for opportunities to enhance wealth generation. People have more
resources to invest in but may pursue a less risky approach such as investing in Hybrid or Debt funds.
Notwithstanding, some amount may be invested in equity shares to overcome inflation stress.
Spending Phase (Age Sixties and Seventies)
The third phase is the ‘spending’ or ‘de-accumulation phase’ in which people have retired from active
service and survive on the income and capital accumulated in the first two phases. People can't afford to
lose capital by investing in riskier options. Asset allocation will mainly be skewed towards Govt. Bonds and
securities yielding regular income.

Gifting Phase (Age Eighties and Nineties)
In this phase, people who have accumulated far more wealth than they will need for their own lifetimes,
decide to pass some of their assets on to others.
The ‘life cycle’ theory suggests that, as individuals move through these phases, their investment needs
and objectives change significantly. Furthermore, there is a transformation in investment from riskier
options to products with guaranteed returns from youth to age old phase.
The aforementioned ages against each phase may vary depending on the financial status and attitude of
the individual towards work. People who retire in forties and fifties witness a skyrocketing expenditure
phase which surpasses the accumulation and consolidation phase. Also, health condition and lifestyle are
important factors in deciding the longevity of the individual. Improved healthcare facilities and comfortable
lifestyle lead to increased longevity.
Since the Lifecycle theories first gained popularity , financial products have developed significantly. It is
paramount for investors of all ages to balance their investment options. Large corporations majorly
employ sophisticated risk-management strategies, however, only a small spectrum of individual investors
utilize such modern techniques to plan their investment portfolios over the four life-cycles mentioned
above.
BEHAVIOR OF INDIAN INVESTORS :
Each investor possesses different mindset when he or she decides to invest in a particular investment
avenue such as stocks, bonds, mutual funds, fixed deposit, real estate, bullion etc. such that the hard
earned money is secured in liquid avenue. However, the decision varies from every individual depending
on their risk taking ability and their purpose for which such investments are done. Saving is prerequisite
for investing. People select that option which meets their financial goals. Investment behavior reveals
how investors reveals how people allocate their surplus financial resources into various
instruments. Its constitutes the reason, quantity, time period and the suitability an investment.
Moreover, empirical studies have shown that information is decisive factor on deciding whether to invest,
which in turn affects the choice of investment and people's behavior to such decisions. In every life cycle
stage, saving objective by an individual always changes which occurs due to investor's age, occupation,
income level category.
Empirical studies to examine investors' nature in India have concluded the following:
i. Savings Objective of Individual Investors:

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People spend voluminously for their children’s marriage and education as people think it wise to save
money with a specific goal to achieve in future such as, for purchasing a house, accumulating wealth for
retirement life, spending for their children's marriage or education. Therefore , to achieve such financial
goals, individual investors always resort to discipline and systematic savings and investments.
ii. Investment options preference among Individual Investors :
One of the key principle for disciplined investing is not to let the hard earned money slip through the
hands. Asset preference pattern of an individual investor provides an insight into the investment attitude of
investors, which influences the policy formation for garnering the individual savings. Every individual
investor should decide where to invest and how much to invest and when to invest, depending on their risk
profile and saving objective they set.
Following important observations from studies are:
 Salaried and self employed professionals save more for their post retirement life in contrast with
entrepreneur class of investors who invest more on liquid funds for future contingencies.
 by Barclays Wealth and Ledbury Research in April’ 2012 suggests Women were found to be more
disciplined, focused and usually more conservative than their male counterparts as they prefer to
invest more in debt related instruments and in bullion. Changes in income alters the saving
percentage.
 FDs and investment in real estate are the most popular savings and investment avenues for male
investors whereas, whereas investment in real estate and bullion are the most preferred avenues
for the female investors.
 The Government sponsored small saving schemes such as national saving certificates (NSC),
public provident fund (PPF), Indian post office saving schemes, etc., have got wider acceptance
and are preferred by both male and females.

SELF EMPLOYED
•Males: real estate, term
deposits in bank and
insurance products
•Females: bullion, Fixed
Deposits and real estate
ENTREPRENEURS
•Males: real estate,
bullion, equity shares
•Females: bullion, real
estate, equity shares,
mutual funds
SALARIED
EMPLOYEES
•Both male and female:
real estate, FDs, LIC
endowments plans
including ELSS, ULIP and
pension plans.

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CHANGING FINANCIAL SYSTEMS IN INDIA - RELEVANCE, EVOLUTION AND PRESENT STATUS
Relevance of financial system for economy :
The saving and investment process in a financial framework aids economic upswing through appropriately
mobilizing savings and allocating them to the most productive uses by following a
centralized/decentralized approach or both. Economies with underdeveloped capital markets adopt a
centralized approach, whereby financial intermediaries mobilize resources from savers and allocate them
to borrowers. Banks play an imperative role as "intermediaries" whereby they deal with transaction costs
and information asymmetries in a financial system. As financial markets develop, transaction costs and
information asymmetries reduce, the decentralized approach for guiding the saving-investment process
also gains significance, and households with surplus resources increasingly invest in capital market
instruments.
Financial systems are crucial for capital formation. It is universally accepted that capital
formation is indispensible to a speedy economic development. The main function of the financial systems
is to collect savings and invest them in industries, stimulating the capital formation and accelerating the
economy.

There are 3 processes of capital formation :
i. Savings: The ability by which resources are set aside and become available for other purposes.
ii. Finance: The activity by which the resources either assembled from those released by
domestic savings , obtained from abroad, or created as bank deposit and then placed in the hands of
the investors for industries.
iii. Investment: The activity by which these resources are actually committed to production.
Thus, the volume of capital formation depends on effective mobilization of savings and the
efficiency of financial organization / systems in channelizing these savings into most desirable
productive form .
Evolution of Indian Financial Systems:
An efficient and developed financial system is important for rapid economic growth of any country.
However, the structures differ widely depending on political economic condition of the country.
The planned economic development in India had greatly influenced the course of financial development.
The liberalization/deregulation/ globalization of the Indian economy since the early nineties have had
important implications for the future course of development of the financial systems.
The evolution of Indian financial system falls into three distinct phases :
Phase I : Pre 1951
India financial market is one of the oldest in the world . The history of Indian capital markets dates back
200 years toward the end of the 18th century when India was under the rule of the East India Company.
1951: Planning Commission set up, mixed economy established, changes in the decrepit financial
system
The development of the capital market in India concentrated around Mumbai where around 200 to 250
securities brokers were active during the second half of the 19th century. The securities exchanges of
Mumbai, Ahmadabad and Kolkata were established as early as the 19th century. Despite , early start,
there were serious limitations and the financial system was not responsive to opportunities for industrial
development particularly the growth to new and innovative enterprise.

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Phase II : 1951 to Mid Eighties
One aspect of the changes was the progressive transfer of the institutions from private to public
ownership. Some of the steps in this direction were -
 Nationalization of RBI ,
 Setting up of State Bank Of India by taking over the Imperial bank Of India,
 Nationalization and merging of 245 life insurance companies into state owned Life Insurance
company(LIC), which emerged as the largest reservoir of long term savings in the country
 Setting up of UTI.
 Developmental banks such as IDBI, IFCI,ICICI etc were conceived for directing capital into chosen
areas of industry in accordance with the planning priorities.
The banking policies and practices were molded to the tune of planning processes and they were
encouraged to finance the industries. Extensive legal reforms were carried out to protect investors and
infuse confidence in industrial securities.
1960s: Nationalization of 14 major private banks, which would mobilize deposits from the household
sector. This has bolstered the financial savings of the household sector and hence the overall saving rate.
Notwithstanding the liberalisation of the financial sector and increased competition from various other
saving instruments, banks continue to play a dominant role in the financial intermediation of the Indian
economy. The deregulation of interest rates has opened up new avenues for banks to mobilize funds at
competitive rates. Moreover, banks, reckoned as the ultimate platform for clearing and settling for all
financial transactions, provide accounts and resources to other sectors including other financial
intermediaries.
A serious drawback with developmental financial institutions was that they depended resources from RBI
and government could not mobilize enough savings that would enable the banks to meet the industrial
requirements. The securities/capital market was still a marginal institution.
Early 1960s: set up of 8 Securities Exchanges in Mumbai, Ahmadabad and Kolkata apart from
Madras, Kanpur, Delhi, Bangalore and Pune.
Phase III : Post Nineties
1991: Capital market orientation/reforms undertaken. The Indian financial system has witnessed a
profound transformation since the launching of new economic policies .The developmental process shifted
to free market economies and the government's role of distributing finance and credit has nosedived.
The capital market had emerged as the main agency for earmarking resources to all Indian segments:
public, private sector, and is facing competition with the state governments.

The notable developments are:
 Privatization of financial institutions,
 Reorganization of institutional structure,
 Investors' protection.
To sustain the growth process, banks would have to continue funding on a large scale. In India, there is an
enormous potential of savings in rural and semi-urban areas. Also, large part of domestic savings is
locked up in unproductive physical assets. Thus, mobilizing savings from hitherto untapped areas and
converting physical savings into financial savings would necessitate introduction of appropriate products
to suit the demand of savers. Indeed, banks are in an ideal position to accomplish this task because of
safe and liquid deposits. In India ,banks have mobilized a sizeable share of savings of the household
sector and channeled them to the deficit sectors, viz., the private corporate and public, thereby, supporting
the growth process .Increased access to banking facilities has facilitated bank penetration.
Bank deposit shares in gross financial savings of the household sector:
PHASE (TIME PERIOD) TREND REASONS
1970-71 35.7%
1983-84 42.5% Expansion of bank branches
1994-95 38.4% Disintermediation in the financial
system on account of
households’ preference for capital
market instruments.
2004-05 36.4% Decline in government's policy
thrust on small savings
2006-07 55.6% Aggressive deposit mobilization
by banks, partly facilitated by the
extension of tax benefits to
special deposit schemes as
detailed in the subsequent
sections. The higher interest
rates on time deposits and
unchanged interest rates on small
savings contributed to some shift
of funds from small savings to
bank deposits.

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1980 and 1990s onwards: generalized propensity towards mutual funds. Along these lines, tax
benefits were provided under Section 80M of the Income Tax Act. Under this section, the dividend
received by the companies was exempted from the income tax so long as the dividend paid by them was
more than the dividend received. Consequently, corporates invested large funds in the then Unit Scheme-
64 (US-64) of the erstwhile Unit Trust of India (UTI).
1987-88 and 1995-96: set up of 21 new mutual funds with 128 new schemes. Individual investors
were also attracted to units of mutual funds. Facing aggressive competition from newly established mutual
funds, UTI also followed a brisk policy of launching new schemes, especially during the latter half of the
1980s to meet investor’s diverse income and liquidity needs.
Mutual funds and direct investments in shares may provide higher returns than interest rates on bank
deposits, so people switched the household financial savings from bank deposits to shares and
debentures and units of mutual funds. Deposits mobilized by NBFCs during this phase also grew rapidly.
1970-80: Two-fold rise in NBFCs
1980-90: Eight-fold rise in NBFCs
1990-94: annual growth of financial assets increased to 44.6%. Alternatively, the share of bank
deposits in financial savings of the household sector plummeted during the same time frame.
An empirical study conducted for India also found that Mutual funds, non-convertible debentures (NCDs),
life insurance policies of LIC and small savings surrogated time/term deposits of scheduled commercial
banks.
October 1997: Deregulation of deposit rates by removing the links with the Bank Rate. Consequently,
the Reserve Bank gave the freedom to commercial banks to fix their own interest rates on domestic term
deposits of various maturities. Banks were encouraged to put a flexible interest rate system on deposits
(with a fixed rate option) in practice as early as possible in April 2002. Now banks have complete freedom
in fixing their domestic deposit rates, except interest rate on savings deposits, which continues to be
regulated and is currently stipulated at 3.5%.
Distinct and diverse bank features have ascended bank deposits over different time periods. In the phase
beginning immediately after nationalization of banks, bank deposit growth accelerated sharply as banks
were rapidly expanding their network to the village level to tap savings from rural areas.

Second phase, (1984-1995): Bank deposit growth decelerated as banks faced increased competition
from alternative saving instruments, especially capital market instruments (shares/debentures/units of
mutual funds) and non-banking financial companies. This was the phase of disintermediation as savings
were increasingly deployed in alternative saving instruments.
Third phase, (1995 - 2004): Further deceleration of bank deposits. They faced competition from post
office deposits, which carried significantly higher tax-adjusted returns than bank deposits. Nonetheless,
bank deposits maintained their share in the savings of the household sector.
Both ownership pattern and maturity pattern underwent considerable changes. Bank deposits held by the
Government and corporate sectors rose significantly, resulting in the slip of deposit shares by household
sector even as the share of banks deposits in household sector financial savings remained broadly
unchanged. The share of term deposits in total deposits increased attributed to the increment in the share
of the Government and the corporate sectors, as the share of the household sector in term deposits
declined. However, within term deposits, there was a significant shortening of maturity profile in favor of
short-term deposits.

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Securities Exchanges are one of the factors that have revolutionized the Indian economy. The high
growth as the financial markets played an all-inclusive role in sustaining financial resource mobilization.
Many PSUs (Public Sector Undertakings) that decided to offload part of their equity were also helped by
the well-organized securities market in India.
CONCLUSION :
1991: Liberalisation of economy,
dismantling of controls, Initial Public
Offer (IPOs) launched, new
companies with new products
established
1992: 21 Regional Securities Exchanges
(NSEs), Over the Counter Regional
Exchange of India (OTCEI) ushered
easier and transparent trading in
securities of large scale (NSEs) and
small scalse sectors (OTCEI)
1994: Integration of IT
into capital market
infrastructure pushed up
the operational efficiency
of the Indian stock market
to global standards, thus
the country has been able
to capitalize on its high
growth and attract foreign
capital like never before.

Savings are important for individual as well as the economy. A high level of savings helps the economy to
progress on a continuous growth path since investment is mainly financed out of savings. In view of the
importance of savings , there have been extensive studies on various aspects of savings including the
behavioral side of it.
In India, the household sector has been the major contributor towards savings. The ultimate motives for
savings are provision for retirement and taking care of emergencies.
The measures vis-à-vis nationalizing banks and insurance companies for banks to reach out to
hinterlands, instituting UTI, strengthening the cooperative credit institution , deregulating the interest
rates etc have swelled in savings and their mobilization rates. With the development of capital market ,
there has been a skyrocketing preference for saving in market related instruments such as mutual funds
and equity due to maximum returns even though they are subject to market risks and losses. For risk
averse like salaried persons, NSC, government bonds are quite popular. Various tax saving schemes
have also elevated households' savings.
''I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy
when others are fearful.'' - Warren Buffett