Indian asset managers are predicted to package and sell more gold-related products as the industry fights to prosper amid an anticipated consolidation phase.

Vikram Kotak, CIO of Birla Sun Life Insurance, estimates that the incremental savings pool of Indian households could swell to Rs90 trillion ($2.04 trillion) within the next five years if it continues to grow at its current pace.

This would seem to spell good news for the country’s 41 fund management firms and 23 insurance companies. Although aggressive in savings, Indian investors are conservative in investing, putting less than 50% of savings into financial assets.

Of that, they park 56% in bank deposits and 12.5% in cash, according to 2009 Reserve Bank of India figures. Direct equity investment, on the other hand, is a mere 3% (or 10% including indirect exposure).

This is an anomaly that Indian asset managers are trying to rectify. But the mutual fund industry in particular has been facing a slowdown in equity flows and margin pressure on the back of regulatory changes and the global financial crisis.

In 2009, the Securities & Exchange Board of India (Sebi) banned upfront commissions paid on the sale of mutual funds. The move was aimed at enhancing the customer value proposition by lowering mutual fund costs and eliminating the incentive for distributors to churn clients' portfolios.

But while this move lowered costs to the consumer, it also reduced incentives for distributors to sell the funds. Mutual funds are now focusing on increasing efficiency to counter a flattening of revenues, with a period of industry consolidation widely forecast.

The life insurance sector has a separate regulator, the Insurance Regulatory & Development Authority (IRDA). With the opening up of the sector to private players and the advent of unit-linked insurance plans (Ulips), the industry has grown in size. Kotak notes that insurance premiums as a percentage of GDP have doubled over the past 10 years to over 4%.

Last year the insurance industry, particularly Ulips, went through its own phase of regulatory changes, notably reducing their costs and making them more customer friendly.

In the near-term investors are expected to continue to favour bank deposits and physical assets such as real estate and gold, Kotak notes. The high administered rate for India's Employee Provident Fund, Public Provident Fund and Post Office savings scheme, which offer risk-free returns, also act as deterrents to equity investments.

“You can’t expect [Indian investors] to change their saving pattern quickly," says Kotak. "The investor education process will take time. However, with a younger and more literate population with higher income and rising risk appetite, we will surely see a larger proportion of savings move into equities and equity-linked instruments over the medium to long term."

He is expecting more Indian asset managers to develop financial products around gold, noting that Indian households own about 18,000 tonnes of the precious metal valued at $827 billion, or 50% of the Indian economy's GDP.

He adds that exchange-traded funds (ETFs) also have bright prospects, since they enjoy low costs combined with increased transparency. He sees ETFs as providing a good platform for indirectly participating in India's economic growth, with gold-linked ETFs likely to grow over time.

“There are many ETFs in India based on different indices, different exchanges and different asset classes, but the size [of India’s ETF market] has not grown up yet due to low awareness and understanding of these products,” Kotak notes.

Gold-linked ETFs could catch on over time, Kotak notes. “Asset managers will bundle around the physical product,” he says.

Gold purchases in India accounted for 32% of the global total in 2010, according to figures from the World Gold Council, with most Indian households buying it in substantial amounts for weddings.

The council points out that gold demand in India has grown 25% despite a 400% rise in price (in rupee terms) in the last decade, a trend that it expects will gather pace.