This report is from this week's CNBC's "Inside India" newsletter which brings you timely, insightful news and market commentary on the emerging powerhouse and the big businesses behind its meteoric rise. Like what you see? You can subscribeSquirreling away a portion of one's income for a rainy day would typically be considered prudent behavior. Yet, in India, it's helping make stocks overvalued.
While the program's benefits are apparent, from reducing friction for investing to removing the need to time the market, SIPs have also been partly responsible for pushing Indian stock markets to record valuations since they force fund managers to buy stocks regularly. "This particular product, and broadly speaking, the domestic investor, has driven the upsurge in the Indian stock markets," Mahesh Nandurkar, head of India research at Jefferies, told CNBC. "If the money comes into the funds, the fund managers obviously have to invest."
As the domestic investor base continues to grow, turbulence in foreign markets will likely have a more negligible impact in the future. According to Jefferies, Indians save about 18% of GDP, or about $800 billion yearly. Of this, only $40 billion — or 5% — is estimated to flow into equities through SIPs, insurance, and pension schemes.
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