In the past couple of weeks, I have heard more market participants talking about alternative assets like precious metals, cryptocurrencies, and bonds as compared to equities and equity derivatives. The trend has been more conspicuous, particularly after the first phase of voting for the 18th Lok Sabha. The participants who were confident about an overwhelming majority for the incumbent government and strong equity rally post declaration of final results on 4th June are now finding a need to hedge their exposure to equities. Surprisingly, none of the non-institutional investors/traders mentioned using equity derivatives to hedge their investment portfolios or trading positions.
I would like to share some of my impressions gathered from my numerous interactions with a variety of investors and traders - from very small ones to ultra-high networth; from frequent and short-term traders to long-only investors; from highly educated to less educated; professionals, businessmen to salaried; metro residents, tier2 & 3 town residents to semi-urban residents, etc.
· The understanding of equity derivatives is poor and misplaced. Most investors/traders assume Futures and Options to be speculative instruments only. They are mostly unaware of the hedging function of the equity derivatives. The intermediaries are playing a negligible role in promoting this awareness. Often their role is limited to making the clients sign complicated and illegible risk disclosure documents and posting some elementary guidance material on their websites.
· Contrary to popular belief, a significant number of traders are looking to buy precious metals (gold and silver) for short-term trade.
· The knowledge about precious metal market dynamics is abysmal amongst investors. Most people are buying gold and silver based on preconceived notions or word of mouth. Silver in particular is a strange case. Very few people have previous experience of buying or holding silver as an investment or trade. Given the complications in owning silver in physical form, most of them are looking at buying silver derivatives. Only a few are aware of Silver ETF etc.
· Cryptocurrencies are becoming a normalized trading option for young participants. Notwithstanding the regulatory limitations and frequent cautionary statements from the regulators, a large number of urban youth have taken to trading in cryptocurrencies. A large number of young traders are trading in cryptocurrencies on the advice of unregulated and unauthorized advisors. Their understanding of the underlying currencies is almost zilch. There is no effort from any side to create awareness about the cryptocurrency.
· A large number of household investors have been advised to allocate a larger proportion to bonds to benefit from anticipated rate cuts. Some of these investors are edgy as the narrative is moving away from “imminent cuts” to “cut or not to cut”.
I clearly remember in the 1980s and 1990s a large majority of Indian households believed investing in equities to be akin to gambling. They avoided investing in equities and preferred bank deposits. In the 2000s awareness about equities started to grow. New-age businesses, especially IT service companies and financial services firms, which paid a significant part of remuneration to their employees in the form of stock options, made equities an essential part of many middle-class households. The cult has been growing ever since.
However, in recent times, I am finding the fears of the 1980s generation are now coming true. Trading in equities, precious metals, bonds, etc. is increasingly becoming akin to gambling.
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