MARKETS, RETAIL INVESTORS TANGO TO NEW HIGHS
As more investors enter the markets, the palette of investing style becomes more colourful. Each investor brings in their own biases, impulsive actions and assumptions to the markets. Sometimes this triggers unexpected outcomes especially when we look at those outcomes in the context of historical precedents.
In recent years, the markets have defied a historical precedent—that retail investors, generally, are late entrants to the markets when certain rallies are at their peaks. Over the past few years, the markets have defied this precedent as retail investors continue to make their presence felt in a pronounced manner. Actually, there has been a rise in retail investors to such an extent they have become a formidable force in the markets.
And, importantly, this resilience is expected to last much longer. This is because there are certain fundamental changes which support longer and sustained participation of retail investors. It is important to understand how household savings are increasingly being invested in financial assets. This can be understood by considering two key variables: savings and investment rate.
According to the Reserve Bank of India (RBI) data, as of 2021–22, savings rate as a percentage of gross domestic product (GDP) stood at 30.2%. Interestingly, the investment rate was 31.4%. This shows that increasingly people have realised the importance of investing. Besides this, according to the RBI, the share of household savings in financial assets stands at 56%. The share of household savings in physical assets stood at 44%. Financial assets include cash, stocks, bonds, mutual funds and bank deposits. This higher proportion of household savings in financial assets shows the increasing preference among retail investors to invest in the markets.
Let us understand the triggers which have enabled increasing investments of retail investors:
Digital Infrastructure
Investments in technology have empowered individual investors to not only transact in securities but also seek information. In the past decade, two major developments have smoothened the journey of retail investors in the markets. One is the emergence of trading platforms to buy and sell stocks. And the second has been the emergence of payment mechanisms to fund broking accounts. These facilities have become accessible to retail investors through their smartphones.
Today, it is easy to open a trading account. Unified payment interfaces (UPIs) have also made it easy to fund a broking account. Also, most trading apps in mobile phones are well-equipped to offer much-needed information to investors to make an informed decision. Even a small investor from a remote town can invest in the Indian stock markets.
Going Direct
As a result of such favourable trends, millennials and Gen Z have found investing in the markets through smartphones convenient and profitable. The tech-savvy lot of investors have opened a record number of demat accounts. Three months in a row more than 40 lakh demat accounts have been opened. In February this year, 43 lakh new accounts were opened, taking the total demat account count close to 15 crore. Unique investor count has crossed 9 crore for the first time, according to data shared by the National Stock Exchange of India (NSE).
There is the lure of multi-fold returns of mid-sized and small-sized companies, which brings investors to the markets. As a result, traded volumes in the Indian stock
markets have been on the rise. A large chunk of this is contributed by India’s retail investors—both small as well as high net worth individuals.
Mutual Funds Sahi Hai
Mutual funds (MF) are catching up in a big way with retail investors. The Indian MF industry crossed Rs 50 lakh crore in asset under management (AUM) in December 2023. Investing in MFs through the systematic investment plan (SIP) route has been the preferred mode. Inflows through the SIP mode stood at Rs 19,186 crore in February 2024 compared to Rs 7,528 crore, three years ago. The number of SIP accounts opened stood at 8.2 crore in February 2024.
MFs are also preferred by investors due to tight regulation, low cost and performance record of money managers among other benefits. Low-ticket size is another key hook for many investors in MFs.
Investment Products
Along with traditional MF schemes, investors have realised the advantages of investing through passive mode. Exchange-traded funds (ETF) and index funds tracking indices including stocks, bonds and commodities such as gold and silver are gaining acceptance in India. These passive funds managed assets worth Rs 8,830 crore in February 2024 compared to Rs 3,040 crore three years ago. Though a large chunk of this is an outcome of sustained investments by Employees’ Provident Fund Organisation, the role of retail investors in expanding the AUM cannot be undermined.
More than traditional passive funds that track marketcap-based indices such as the Nifty 50 index or the S&P BSE Sensex, factor-based index funds are catching up with retail investors. These index funds and ETF offer baskets of stocks selected based on factors such as value, quality, momentum and alpha. MF houses have also added to their available products such funds to tap into retail investors varying investment needs.
In addition to MFs, individual investors have options
ACCORDING TO THE RBI, THE SAVINGS RATE AS A PERCENTAGE OF GDP STOOD AT 30.2%. THE INVESTMENT RATE WAS 31.4%...PEOPLE HAVE REALISED THE IMPORTANCE OF INVESTING
such as portfolio management services, alternate investment funds to route their money into stocks. Service providers in these domains have also launched differentiated products targeting specific needs.
Resilience
As more investors started investing in stocks directly or indirectly, they emerged as a formidable force in the Indian equity markets. Foreign portfolio investors sold shares worth Rs 12.1 lakh crore in 2022. It was a year when capital flowed from emerging markets to the US as interest rates were hiked in the US and the dollar gained against all global currencies. Despite such huge selling, the Nifty 50 index gained 4.32%. This established the fact that domestic money has emerged as a force that more than offset selling pressure by foreign investors. Similar selling in the past had negatively impacted the Indian markets and major indices had fallen.
Now, let us understand how the stage is set for further participation from retail investors in the markets.
Retail investors have been investing in mid- and smallcap stocks either directly or through MFs. This has led to bigger moves in the small- and mid-cap stocks compared to large-cap stocks. Globally, economic growth is slowing down and there are a few economies such as India that are recording growth. Inflation is falling. Interest rates are also about to fall this year. These developments make domestic investors’ participation vital in any market. It not only reduces volatility but also gives an opportunity to create a sustainable wealth pool to domestic investors.
Improving awareness about investing, increasing disposable income and the need to provide for long-term goals such as retirement, health-care expenditure and children’s education should encourage more retail investors to invest in equities.