Why India’s Capital-Market Allocation Is Still Underdone

Indian households are meaningfully more invested in capital markets than a decade ago, but relative to global peers, allocation is still low. That gap is both the scale of the opportunity and the size of the responsibility in front of policymakers and product manufacturers.

The headline gap: 15–20% vs 50–60%

Mutual funds and listed equity together account for only about 15–20% of Indian household investable assets. In the US and Canada, the comparable share is roughly 50–60%. In Brazil, it is in the 40–45% range.

In other words, Indian household balance sheets are still dominated by deposits, insurance, retirement schemes, real estate, and gold, while developed markets and some emerging peers have a much larger share in market-linked instruments. The last decade’s shift into mutual funds and equities is real, but it is still a gradual convergence toward a pattern that is already common elsewhere.

Why India is under-allocated

First, modern market infrastructure is relatively young. Deep, broad public markets, reliable custody and clearing, and a strong investor-protection framework have been in place for much longer in North America and parts of Europe. India’s current architecture, including SEBI in its present form, the evolution of mutual fund regulations, RERA in real estate, and stronger banking supervision, has mostly been built in the last few decades. It takes time for households to move from a mindset where markets are perceived as speculative to one where they are viewed as a normal way to compound savings.

Second, tax and policy design have historically nudged households less strongly toward capital markets than in some peer countries. In the US and Canada, tax-advantaged structures such as 401(k)s and RRSPs systematically channel long-term savings into mutual funds and other market-linked products. In Brazil, mutual funds became a default savings vehicle as a result of policy choices and interest-rate history. India is moving in that direction with schemes such as NPS, EPF expansion, and relatively favourable mutual fund taxation, but the system-wide “auto-pilot” push into capital markets is still developing.

Third, real estate and gold remain strong cultural defaults. Even though the Indian equities have delivered roughly 10–12% annualised returns over the past 15 years compared with around 6% from real estate, property and gold still offer visibility, tangibility, and social signalling that financial assets do not yet fully replicate. Older cohorts, in particular, continue to hold a large share of wealth in physical form.

What is changing: early stages of convergence

Mutual fund assets under management have grown roughly sixfold over the last decade. Direct equity holdings have risen to about ₹42 lakh crore, and demat accounts have increased almost fivefold since FY20, helped by digital platforms and easier onboarding. Over the past 10 years, capital-market allocation has risen by around 10 percentage points in listed equity and about 5 percentage points in mutual funds as a share of household investable assets.

Looking ahead, individual mutual fund AUM is projected to cross ₹300 lakh crore over the next decade, with household penetration rising to around 20%. Direct equity holdings are projected to approach ₹250 lakh crore over the same horizon, with more than 12 crore investors participating. The starting point is low, but the trajectory is upward.

Should India aim for US-style capital-market allocation?

The comparison with North America is useful, but it does not automatically follow that India should target a 50–60% capital-market allocation.

A higher share of mutual funds and equities in household portfolios has clear advantages: better diversification relative to property and gold, higher expected returns over long periods, more efficient capital formation for companies, and a larger domestic investor base to balance foreign flows.

There are also risks. Greater direct exposure to markets means household balance sheets are more sensitive to volatility. If allocation rises faster than investor understanding, there is scope for misallocation, over-trading, or disappointment when returns normalise. Some countries with high mutual fund penetration, such as Brazil, also show that capital-market allocation can be heavily skewed to fixed income when history and policy favour that outcome; high penetration does not automatically equate to high productive risk-taking.

India needs to find its own equilibrium: higher capital-market participation than today, but with structures and investor behaviour that match local conditions.

What needs to go right for the gap to close sensibly

If India’s capital-market allocation is to rise in a way that is durable and healthy, several pieces have to move in step.

First, product design and regulation need to remain robust. For households to shift a larger share of wealth into market-linked products, they need confidence that core products behave as expected. That implies avoiding structural liquidity mismatches, maintaining clear rules on suitability and disclosure, and enforcing norms around mis-selling. SEBI’s role in tightening frameworks and supervision across products and distribution channels remains crucial.

Second, tax and policy nudges have to be coherent and predictable. Broadly consistent tax treatment between listed and unlisted assets, and between debt and equity, helps households make allocation decisions on fundamentals rather than on short-term tax arbitrage. Using retirement products as steady channels into market-linked assets through NPS, EPF-linked schemes, or mutual-fund-based retirement plans can gradually embed capital-market exposure as a default in investor portfolios.

Third, behavioural support must keep pace with digital access. It is now possible to open a brokerage or mutual fund account and begin investing within minutes from a smartphone. Platforms, advisors, and regulators together will need to promote sensible portfolio construction, make risk more intuitive, and temper features that encourage excessive short-term trading.

Why this matters for private markets

The allocation gap is not just a public-equity issue. Private markets, including alternative investment funds (AIFs), unlisted equity, private credit, and vehicles such as REITs and InvITs, ultimately draw from the same underlying pool of household savings, either directly through affluent and HNI investors or indirectly through institutions funded by households.

If India remains significantly under-allocated to capital markets, private markets will continue to depend heavily on foreign limited partners and a relatively narrow domestic capital base. If allocation rises in a measured way, India can gradually build a deeper local LP pool, provide more patient risk capital to private businesses, and align more citizens economically with both listed and unlisted corporate growth.

In that sense, the gap versus global peers is neither a point of concern nor of celebration on its own. It is a quantifiable measure of how much room there is for India’s capital-market participation to deepen and how carefully that transition needs to be managed.

Research Analyst

Simran Mehla

Frequently Asked Questions

Q: How much of Indian household wealth is in mutual funds and equities today?

A: Mutual funds and listed equity together account for only about 15–20% of Indian household investable assets, versus 50–60% in the US and Canada and 40–45% in Brazil.

Q: Why is India’s allocation to capital markets still low compared to developed markets?

A: A relatively younger market infrastructure, fewer tax-advantaged vehicles that automatically channel savings into market-linked products, and a continued preference for real estate and gold, especially among older cohorts.

Q: Is capital-market participation in India actually growing?

A: Yes. Mutual fund AUM has multiplied over the last decade, direct equity holdings and demat accounts have surged, and the share of household investable assets in mutual funds and equities has risen meaningfully, although from a low base.

Q: Should India aim to reach US-style levels of capital-market allocation?

A: No, allocation has to rise alongside robust product design, regulation, and investor understanding.

Q: How does this allocation gap affect private markets in India?

A: Private markets ultimately rely on household savings, directly or indirectly. A deeper domestic capital-market base can support a stronger local LP pool for private equity, private credit, and real assets; a shallow base keeps these segments more dependent on foreign capital.

Sources

How India Invests 2025 – Bain & Company