Ye Dil Maange More, Say Market Players But Where Are The Investors

In the year 2015, as many as 2.41 crore demat accounts were active in a country having population over 130 crore. A year later, number of demat accounts in operations shot up to 2.66 crore marking 10.37 per cent rise on a year to year basis while Indian population went up by just 1.2 per cent. As we file this report, official data suggests NSDL having 1.51 crore demat accounts under its umbrella while CDSL is housing as many as 1.15 crore demat accounts. The numbers above clearly indicate a significant rise in the numbers of retail investors participating in the country’s equity markets irrespective of its highs and lows. While some call it a healthy growth, there are others who believe the rise in numbers of operational demat accounts is anything but impressive. Meanwhile stock exchanges like BSE, NSE, regulatory bodies like SEBI, broking firms and other such stake-holders of the equity markets have been trying to impress the aspiring investors to come and join the market bandwagon. 

While all the concerned stakeholders have indeed progressed in line with the stock market growth in India the retail investors are still left with a feeling that they have not benefitted as much as they could and should have. There still is a lurking feeling amongst majority of retail investors that stock market is not the place where decent amount of money can made.  The apprehension in the minds of retail investors could be a culmination of several concerns such as 

a. stock market is not safe , 
b. stock market is manipulative and prone to scams,
c. stock market is a casino and requires tonnes of money to stay put in the game, 
d. too many factors affecting the markets makes it incomprehensible thus making the decision-making task almost impossible

In spite of various initiatives taken by the policy-makers and market regulator i.e SEBI and healthy market conditions, there remains a large scope for increase in the number of operational demat accounts even in urban India, which is the top contributor to the total number of demat account-holders in the country. This is obvious from the fact that the number of demat accounts remains abysmally low at one to two per cent of the entire population. Says a spokesperson of NSE, “The market has around 13 crore investors, grown multiple times in the last 10 years. Oflate, the market has got few products which are well-researched, small-ticket and retail-savvy. One such product is ETF-here too the underlying AUM has grown five times in the last five years. The traditional cash market is also looking better as average volume per day is growing. New clients are coming to the market. As an Exchange we are constantly trying to promote knowledge on financial markets and products. NSE organises around 2000 awareness programmes across India as well as we try to pitch basic financial education to students through our partnership with various central and state boards.”

Unfortunately rural investors have been risk-averse with only 25 per cent of the total demat accounts being from rural areas reflecting lack of growth since 2010-11. The penetration of the capital markets in India even today is limited to a very few states. The top three states contribute 45 per cent of demat accounts whereas top ten states in India contribute almost 84 per cent of the demat accounts, further emphasising that majority of investors still do not consider capital markets as their preferred investment destination. Prashant Prabhakaran, President of IIFL agrees to this phenomenon. “We are working sincere and hard since 1995 to educate investors and bring them to the equity markets. The process is long-drawn and we are witnessing responses now from people even from rural India but it will take time to woo more investors from the rural areas in our country. There is still inertia among them when it comes to equity investments,” he explains. Nikhil Kamat, Co-founder of no-frill broking house, Zerodha, says, “New demat accounts in Zerodha are growing at an exponential pace. We have added over one lakh demat accounts in the last 12 months alone which is five times higher than what we have achieved in the previous year. We believe this rate of growth, while being starkly higher than industry, speaks about the underlying industry which is also growing very quickly.” 

Time and again across global financial markets it has been proven that retail investors have a tendency to participate in market only when the stock prices are trending up and have a tendency to sell when the prices are trending lower. In other words, retail investors as a group are prone to buying high and selling low, which results in losses and scares them away from participating in the equity markets regularly. This herd mentality or whimsical behaviour, so to speak, of retail investors has been a cause of concern especially to the regulators and policy makers. SEBI aims at not only attracting more retail investors into the market but also attempts to change the investor behaviour in order to bring in market stability which is crucial considering the volatile nature of the financial markets. 

Globally, regulators have been taking efforts to promote retail investor interest in the market and, at the same time, focused initiatives have been taken to put in place measures to protect the retail investors. The idea always has been to first encourage participation of retail investors and once they enter the market, protect them by making markets fair and safe. 

One of the most popular method of empowering investors that can lead to making markets fair and safe is investor education. At global level, the International Organisation of Securities Commissions (IOSCO) emphasises the role of investor education and financial literacy as a necessary prerequisite for sound investment decisions. Investor education becomes more important in today’s environment where financial innovation has made investment products extremely complex and virtually non-transparent. 
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Siddhant Jain, CEO of SAS Online believes there are few obstacles when it comes to bringing in more people in the equity markets. “One major obstacle for new retail participation in the equity markets is the onboarding process. We need to focus on the ease of onboarding the client and making the activation process as simple as possible. Also, KYC norms can be further eased and streamlined to make onboarding quick and efficient,” says Jain while interacting with DSIJ. “Of late, there has been a lot of confusion regarding the correct business model for distributors and advisors of mutual funds in India. SEBI needs to get its act together fast and make it a sustainable business for exponential growth in retail participation,” he adds referring to the role of the market regulator.

The increased participation by retail investors in recent years can be attributed to increased activity in the primary markets as it is found that there is direct correlation between number of demat accounts being opened and the activity in the primary market. “Retail participation in the equity markets has been constantly rising since Narendra Modi came to power. Although the euphoria among retail investors is not of the same level as in 1991-92, 2000-2001 and 2008, the fact that NSE and BSE have seen 6-12 per cent year on year increase in retail volumes over the past 12 years, retail portion of IPOs constantly getting over-subscribed and the fast growing MFs’ AUM (especially with the SIPs recently crossing the one crore milestone) shows that the retail participation is constantly on the rise,” Nikhil Khandelwal, MD of Systematix Shares and Stocks told DSIJ. 

Even as market corrections scare away retail investors, it is seen that participation improves slowly but surely as investors regain lost confidence when markets perform consistently well over a longer period – which our markets have done over the past few years. The mid-cap stocks, which usually are hot favourites among retail investors, have done well over the last few years as reflected in the performance of the mid-cap index. 



Another interesting aspect of participation of retail investors in India is the dominance of male investors when it comes to equity markets. The trend remains unchanged with some signs of increased female participation in equity markets via mutual funds. This is the situation on the ground, notwithstanding the general perception that over the last few years women have increasingly become financially independent. Interesting statistics reveal that the percentage of women considering capital market as an investment avenue has remained constant and relatively low at less than 25 per cent. Hence, to improve retail participation numbers, the need is to encourage more and more financially independent female investors to start chipping in.