The retail conundrum
Our study suggests that the disenchantment of household
investors with publically traded equity has substantial implications for near
and mid-term investment strategy.
The small informal survey conducted by us prima facie
validates our belief. We however feel a larger study is needed to fully
substantiate the findings and evolve a workable strategy for further
development of capital markets in the country.
In past couple of years the government and regulators have been
consistent in their concern about indifference of “retail investors” towards
capital markets. Some part of this concern might be flowing from the de
facto failure of almost all disinvestment floats since Coal India. The
finance minister has initiated some nominal and mostly unsuccessful schemes to
lure them back.
The background for this concern mainly is (a) rising investment
in real estate, leading to overheating in some markets (b) persistent high
investment in gold leading to rise in current account deficit, (c) failure of
infrastructure companies in raising equity leading to lower participation in
project bidding and (d) persistent redemption pressure in equity mutual funds
and equity linked insurance schemes.
In order to make a factual assessment of the situation and
assess the mood of the “retail investors” we carried out a small informal
survey involving 32 brokerage firms and many of their clients.
It is important to note that we make a distinction between
household investors and small day traders, traders, and speculators.
The key findings of our informal survey are as follows:
(a)
We find that household investors had began
meaningful investment in listed equity in late 70’s at the time of FERA
dilution of MNCs. Reliance in 80’s and PSU disinvestment and capital market
reforms in early 90’s drew the 2nd lot of household investors. IT
boom of late 90’s drew the 3rd set to listed equity. In these
3decades households invested 8-17% of their financial savings in capital market
related products.
(b)
Post IT bubble burst, the household investors’
participation had been gradually diminishing and has become negative post 2009
for a variety of reasons. What we now have is mostly an assortment of small
traders and speculators actively participating in daily market activity.
(c)
In past three years the small traders and
speculators have moved away from trading in listed stocks, especially small and
midcap stocks. Some part of their activity has moved to commodities market where
volatility is higher, and cost & margin requirements are lower. A large
part of their activity has moved to option segment, mainly Index options. The
option segment volumes now constitute over 80% of daily volumes at NSE, against
10% or less prior to 2009.
(d)
Many people also cited rampant malpractices and
gross underperformance of mutual fund and insurance fund managers as their
disenchantment from listed equities.
(e)
Surprisingly, most people we spoke to were
completely indifferent to the tax incentive available for investing in listed
equity and equity mutual funds. Also Contrary to the popular belief, the change
in MF load structure had little impact on householders’ preference for equity
mutual funds.
On digging a bit deeper, however we find a number of structural
reasons that could be attributed to this shift in preference of household
investors. In the coming days we shall be discussing some of these factors in
detail.
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