The boom in share prices and increasing levels of awareness about the risks of investing in equities is driving millions of young Indians to invest directly in shares. This can, over the next few years, take retail penetration in Indian stock markets closer to the levels prevailing in China.
Neeraj Johar, a mid-level executive working in the IT sector in Gurugram, has a new past time. Every day, he spends at least an hour “buying” and “selling” and “researching” virtual “shares” on Moneybhai.com, one of India’s largest stock market simulators.
This is almost like an online coaching class for stock trading. The platform “gave” him $140,000 in virtual money, which he can “invest” in shares based on their real time performance on the stock market. He will not, of course, make or lose any real money, but is hoping to hone his skills as a trader here before venturing into the world of bulls and bears.
Johar is one among millions of young people who are shedding the conservatism of earlier generations and venturing into the stock market as direct investors – as opposed to the tried and tested way of taking an exposure to the markets via mutual funds.
It’s a trend that is fast catching on among India’s young and, going by global standards, it’s a trend that is likely to gain ground. In the US, as much as 37.6 per cent of total equities are owned by individuals and households. The Financial Times has estimated that individual ownership of shares in listed companies is at 15 per cent in the UK. In China, the figure is 12.7 per cent. Comparatively, Indian still seem shy of dipping their feet into the waters of the stock market. Only 3.7 per cent of India’s 1.36 billion population invest directly in India’s booming stock markets.
Johar is quite clear that he will be willing to take the extra risk in order to try and partake of the much higher returns that stock market investing offers compared to other traditional avenues of investment.
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“If you compare the 20-year returns of the Nifty with that of gold or fixed deposits – the conventional investment options for middle class Indians – you will see the marked difference in returns it offers,” he pointed out.
Johar makes a very compelling point. A sum of $1,000 invested 20 years ago in the benchmark Nifty 50 would be worth more than $13,000 today. The returns: a CAGR of more than 13.5 per cent. The same sum of money invested in gold two decades ago, would have appreciated to $8,300, giving a CAGR of 11.2 per cent. Parking the money in fixed deposits would have seen it grow to $4,000, a compounded growth rate of 7.3 per cent annually.
In fact, if one considers any long period, equity returns outstrip all other asset classes by a fair margin. Yet, Indian retail investors have traditionally been shy of investing in stocks. Why?
The short answer to that is volatility. If we take the above example, we will see that the Nifty 50 index was ahead of gold till 2008 when the collapse of Lehman Brothers sparked off the global financial meltdown, aka, the sub-prime crisis. For the next five-six years, risk averse investors preferred the safety of gold; the Nifty underperformed gold during this period.
However, gold prices began stagnating around 2014, while the Nifty rose steadily over the next five-six years. Then, after a dramatic correction early last year, Indian equity markets went through the roof in the last two quarters of 2020-21, enabling the Nifty to easily beat gold returns hands down.The short answer to that is volatility. If we take the above example, we will see that the Nifty 50 index was ahead of gold till 2008 when the collapse of Lehman Brothers sparked off the global financial meltdown, aka, the sub-prime crisis. For the next five-six years, risk averse investors preferred the safety of gold; the Nifty underperformed gold during this period.
However, gold prices began stagnating around 2014, while the Nifty rose steadily over the next five-six years. Then, after a dramatic correction early last year, Indian equity markets went through the roof in the last two quarters of 2020-21, enabling the Nifty to easily beat gold returns hands down.
It is this extreme volatility that scares retail investors, but historical data shows that equity has trumped returns from gold and all other asset classes over the long term. That’s because economies of most countries – and definitely a country like India – are expected to leave periods of volatility behind and show secular growth over any selected long-term period.
If one considers the last 15 months, the benchmark BSE Sensex has been extremely volatile. On January 14, 2020, it rose to a then all-time high of 41,994.26 before crashing to 25,981.24 on March 23. Since then, it has kept scaling new peaks, touching an all-time high of 50,181 on January 21, 2021.
This and the lure of easy money, more than anything else, has been drawing retail investors to the market in droves. According to media reports, more than 70 per cent of the fresh customers that leading Indian broking house Angel Broking added to its platform between October and December last year were first time investors who had never before traded in stocks.
This trend, which is evident across trading platforms run by other companies, is likely to grow. Mark Mobius, veteran investor and emerging markets guru, told the Indian media: “In terms of retail investor participation, China is probably a model of what you can expect will happen in India. India could easily equal China's market cap in the next five to 10 years because going forward, growth in India's market will probably be faster. China, because of its size, will probably grow more slowly.”
Contemporary trends seem to be bearing out his statement. The Central Depository Services Ltd (CDSL), which set up to provide convenient, dependable, reasonably priced and secure depository services to all market participants, opened a record 1.47 million accounts in January, a more than 300 per increase over the corresponding month in 2020.
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However, while many experts welcome this deepening and broadening of India’s equity culture, they also caution investors to take lessons from previous boom-bust cycles.
Starting with the 1992 stock market boom, which was later found to be the handiwork of a group of scamsters led by the late Harshad Mehta, every successive bull run has seen the entry into the stock market of retail investors, lured by the prospects of easy returns.
Many of them burnt their fingers when the markets tanked after scaling stratospheric heights. This has contributed significantly to the equity-averse culture in a majority of Indian households.
But greater awareness about the risks involved, more education about the need to stay the course in the face of short-term reverses in the form of price volatility and websites such as Moneybhai.com and others of its ilk are creating a new breed of investors who want to invest directly in stocks in spite of the risks.
As Johar says: “Unlike my parents, I’m not happy with the returns offered by fixed return instruments. I can take greater risks in search of higher returns. I will continue to invest in shares, even if I have to absorb some short-term notional losses.”
That seems to be the mood of the moment in India. And if empirical evidence in other countries is anything to go by, this mood will only gather more steam as the quarters go by.
Retail investment in stocks seems to be an idea whose time has come in India.