Recently, markets reached unprecedented heights, with the Sensex surpassing the 80,000 mark on July 4. One of the key drivers of this ongoing bull run is the increased retail participation.

The number of demat accounts has surged from around 4 crore in March 2020 to approximately 14 crore, indicating that over 10 crore new Indian investors have embarked on the wealth creation journey in recent years.

Additionally, many are participating in the markets through mutual funds. As of May 2024, the total number of mutual fund folios stood at 18.60 crore, with individual investors holding ₹35.54-lakh crore in mutual funds. Overall, investors are a happier lot.

While financial wealth is on the rise, the growth in human capital remains a significant concern. In India, the youth unemployment rate (usual status) was estimated at 12.4 per cent in 2022, over 12 times higher than the adult unemployment rate. In numerical terms, 14.5 million young men and 4.4 million young women were unemployed in 2022.

Worryingly, the youth unemployment rate is in tandem with education level, with the highest rates among those with a graduate degree or higher. This indicates a mismatch of skills.

Moreover, a large proportion of Indian youth are neither in education, employment, nor training. Individuals spent a lot of time analysing their portfolio returns and other financial metrics. However, what is often overlooked is how the employment opportunities or lack of it will impact human capital.

Human component

For many investors especially the younger ones, human capital comprises a larger and significant component of overall wealth compared to financial assets. Human capital represents the present value of an individuals’ future earning potential given their skills, qualifications, and employment prospects. It is a massively important part of one’s total wealth, often comprising close to 100 per cent of the wealth for many young investors.

The value of human capital is highest at the start of one’s working life because all the years of earning income are ahead. At this stage individuals can take exposure to higher risks as they have time to recoup investment losses.

Over time, human capital leads to building of financial capital by saving and investing. Higher human capital leads to building of higher financial assets.

During economic downturns, as financial assets values fall, human capital often becomes an larger proportion of total wealth. It is crucial for wealth managers and individuals to properly account for and manage this important component. Yet this crucial asset is rarely given the attention it deserves.

Human capital is fundamentally different from traditional investments in many ways. Assessing the risk and return characteristics of human capital is a challenging endeavour. Further, unlike stocks and bonds, human capital is illiquid — you can’t sell the future income stream it represents immediately. It is also highly concentrated, as an individual’s earnings are often tied to the specific kinds of work profile individual takes up during the lifetime.

This makes it challenging to diversify in the same way as a portfolio of financial assets. Factors like industry-specific versus general skills, the flexibility to move across work profiles and inflation risk — all impact the value of one’s human capital. A research analyst’s human capital, for example, may have broader applicability and growth opportunities than an architect’s more specialised skills.

Demographic potential

India is at a demographic crossroads. Its large, youthful population represents both a remarkable opportunity and a considerable challenge. The country is in a “demographic dividend” phase, where the working-age segment exceeds the very young and old. This dynamic could potentially fuel rapid economic growth and development.

However, the challenge lies in generating sufficient productive employment for the millions of youth entering the workforce each year. Failing to capitalise on this demographic dividend could diminish the value of India’s human capital and financial assets.

Investors and policymakers must recognise the paramount importance of human capital as the largest component of most people’s wealth. Development of human capital should be just as much a priority as managing one’s financial assets.

Acquiring versatile skills and cultivating a mindset of continuous learning will help individuals in enhancing the value of human capital. Investing in people through quality education and healthcare will help build human capital of the nation.

Skill development initiatives to increase the employability of the youth, coupled with the creation of ample secondary and tertiary sector jobs, will be pivotal.

Failure to do so could mean missing out on the tremendous potential of India’s demographic dividend.

The writer is Professor and Dean (Academics), National Institute of Securities Markets