1 HOW MUCH CAN ASSET PORTFOLIOS OF RURAL HOUSEHOLDS BENEFIT FROM FORMAL FINANCIAL SERVICES? Vishnu Prasad, Anand Sahasranaman, Santadarshan Sadhu, Rachit Khaitan 1 August, 2014 Abstract: The paper‟s objectives are two-fold- first, to understand the composition of asset portfolios of rural households in India, and second, to compare the performance of extant portfolios with a hypothetical portfolio of financial assets. We find that almost the entire asset portfolio (93%) of the average rural household in our sample is composed of two assets - housing and jewellery. Depending on the proportion of these assets in the portfolio, rural households earn a level of return ranging from 6.86% to 14.62% at levels of risk ranging from 5.48% to 18.60%. A comparison with a hypothetical portfolio composed of a limited suite of six financial assets reveals that households could earn a significantly higher level of return, ranging from 10.05% to 16.64% at the same levels of risk. The introduction of an additional long-term pensions product (investment in which is equated to 20% of the households‟ total assets) results in even higher returns at the same levels of risk. We believe that our results point to the urgent policy imperative to extend the benefits of the formal financial system to rural households, and provide them with access to financial instruments that allow them to construct a diversified, tradable, and liquid portfolio that shelters them from fluctuations in the local market. 1 The authors work at the IFMR Finance Foundation. The authors would like to thank Nachiket Mor, Bindu Ananth, Kshama Fernandes, Bama Balakrishnan, Vaibhav Anand, Ravi Saraogi, Ratul Lahkar, and the participants of the NSE-IFMR Conference 2014 for their valuable comments and guidance. The authors would like to thank Nishanth K for research assistance. Comments on the paper may be directed to vishnu.prasad@ifmr.co.in.