Did older Indians discard debt for equity in FY25?

22 May 2025 , 11:11 AM

SOMETHING CHANGED BETWEEN 2020 AND 2025

It is believed that COVID pandemic was the tipping point for a discernible change in Indian investing behaviour. In the past, Indian investors used to follow an anomalous pattern. The short term investors and traders preferred risky equities, while the longer term planners and investors preferred debt. This was in contrast to the other economies, where longer term money went into equities and shorter term money went into debt.

Post the pandemic, Indian investors have turned towards the global model, which is good. What is rather surprising is that the traditional principle of debt allocation (100 – Age) is being critically questioned. The preference for equity and risk assets has increased sharply among higher age categories. Older Indians are not risk averse any longer!

GETTING OLDER, BUT WILLING TO INVEST IN EQUITIES

The table below considers mutual funds as a proxy for investing habits. The colour of net investment flows has been compared between FY20 and FY25 across key age groups.

Age Categories	Less than 25 years		25 to 44 Years		45 to 58 Years		Above 59 Years
MF Class	FY20	FY25	FY20	FY25	FY20	FY25	FY20	FY25
Equity Funds	41%	47%	36%	60%	49%	66%	40%	56%
Hybrid Funds	9%	11%	11%	13%	10%	11%	11%	16%
Debt Funds	33%	21%	49%	18%	39%	16%	46%	21%
Solutions Funds	16%	17%	2%	0%	0%	0%	0%	0%
Passive Funds	2%	3%	3%	9%	3%	7%	2%	6%

Data Source: AMFI Annual Newsletter

The table captures how flows into various categories of mutual funds compared between FY20 and FY25. Here are some quick observations.

• Between FY20 and FY25, a higher share of investment flows across all age groups has gone towards hybrid funds. Interestingly, the biggest change of 500 bps is in the age category of over 59. After all, even older people need asset allocation too.
• A similar trend is seen in passive funds too, with allocation of flows in FY25 sharply higher than FY24. Investors in the age group of 25-44 have seen a 600 bps increase in passive allocation. These investors are using passive funds as a sounding board before venturing into active equity funds.
• The big shift is in equity and debt. In the under 25 age group, equity allocation has increased from 41% to 47% while the allocation to debt is down from 33% to 21%. However, what is surprising is the spike in equity allocation in the higher age groups.
• Investors in the 45 to 58 age group increased active equity allocation from 49% to 66% between FY20 and FY25. In this period, investors above 59 years of age, increased equity allocation of flows from 40% to 56%. There is a proportionate fall in debt allocation.

Is this just a casual post-pandemic aberration, or it denotes an underlying change in the way investors allocate equity in India?

INVESTMENT ALLOCATION – NEW RULES OF THE GAME

Here are some key takeaways from the above table, pertaining to a shift in investor attitudes between FY20 and FY25.

• Investors across age groups have seen a rise in allocation to alternatives beyond traditional equity and traditional debt. This is more of a calibrated shift to equity, through a tempered approach.
• There is greater appreciation that, while equity is volatile in the short run; over a longer period, it not only generates higher returns and wealth; but also manages risk fairly well, if a diversified portfolio approach is adopted.
• The big shift from debt to equity allocation has been triggered by tax treatment that has favoured equity. This shift has became more pronounced after pure debt funds (more than 65% in debt) started to be taxed as other income, irrespective of holding period.
• Lastly, the traditional financial planning rule of “Equity Allocation = (100 – Age)” is well and truly dead. That rule never had any scientific basis and today, even older people have shown an appreciation of equity as a wealth creating asset.

The big shifts in the post-pandemic era have been positive overall. Yes, it does expose investors to risk in the short run, but that is small price to pay for long-term wealth creation.