Do Indian pensioners hold diversified portfolio?

Abstract

Asset allocation, the decision of how much of a portfolio to allocate to different types of securities, is one of the fundamental issues in financial economics. The paper examines the portfolios created out of lump-sum pensionary benefits received by 495 government pensioners who retired between 1967 and 2002. The paper uses the available data for the household investment in financial assets between 1970 and 2002, and compares it with the investment in financial assets of the pensioners. It is found that pensioners in the sample remain under-diversified. They were found to have taken an alarming magnitude of idiosyncratic risk. Despite being seemingly aware of the benefits of diversification, pensioners appear to adopt a “naive” strategy for diversifying their portfolios without giving proper consideration to the correlations among the assets that they invest into. Over the years, the average number of assets in pensioner portfolio has increased resulting in a decrease in the average portfolio variance. This may be ascribed to facts that reforms in Indian market opened floodgates for investment avenues and that these improvements resulted primarily from changes in the correlation structure of the Indian household investment market. Least diversified portfolios were found amongst pensioners who had lesser funds at their disposal and retirees of lower class (junior) categories. An analysis of a cross-sectional variations in diversification across demographic groups also suggest that younger, active and recent retirees are over-focused thereby holding under-diversified portfolios, not by chance but by choice. By and large, results indicate that pensioners face an intimidating task of constructing and maintaining a well-diversified portfolio despite realizing the benefits of it.