There is no denying the fact investments in equity is a must for wealth creation but if the performance of the stock market continues to be as pathetic as it has been in the recent years, retail investors will continue to keep away from markets
For retail investors, the experience of investing in the stock market is getting bitter with every passing day. Both the leading market indices in India, Sensex and Nifty, have failed to show a real growth during the last five years. In 2008, the Sensex touched its all-time high of 21,200 odd levels, which has not been breached even after more than five years. This effectively means that passive investors would have generated a negative return during all these years. It is important to note here that the Dow Jones has already crossed the all-time high level recently in spite of the US economy being in trouble continuously. This is completely in contrast to the Indian economy where the worst-ever growth has not been more than 5% in a quarter. As per the latest press release of AMFI (Association of Mutual Funds in India), there has been a net outflow from equity mutual funds for the ninth consecutive month. The number of demat accounts have stopped growing and even if there is some growth, those are fuelled by increase in the number of accounts opened for investments in commodities and schemes such RGESS (Rajiv Gandhi Equity Savings Scheme) for first time investors. India continues to have a poor share of total investment made by households in equities. Let us look at some of the factors that are driving retail investors from equity investment:
High Volatility in equities: The equity market in India is extremely volatile. There is no doubt that equity markets across the world are volatile but India has a higher level of volatility. Let us look at volatility of some of the leading indices across the world. Barring DAX, all other indices have shown a lower volatility compared to the Nifty. But more important than volatility, what is significant is the capability of investors to absorb volatility. Small investors have limited ability to absorb volatility.
Year | Nifty | DJIA | FTSE100 | S&P 500 | DAX |
2003 | 2.76% | 2.13% | 2.43% | 1.72% | 4.24% |
2004 | 3.22% | 1.44% | 1.24% | 2.96% | 2.13% |
2005 | 2.69% | 1.43% | 1.26% | 2.30% | 1.63% |
2006 | 3.10% | 1.43% | 1.57% | 3.27% | 2.12% |
2007 | 3.28% | 1.96% | 2.02% | 4.80% | 2.30% |
2008 | 5.22% | 4.47% | 5.09% | 2.30% | 5.62% |
2009 | 4.64% | 3.15% | 3.21% | 1.28% | 3.95% |
2010 | 2.28% | 2.17% | 2.49% | 1.39% | 2.40% |
2011 | 3.05% | 2.74% | 2.84% | 1.49% | 4.15% |
2012 | 1.90% | 1.60% | 1.74% | 2.03% | 2.29% |
It is also important to highlight the Economic Survey presented in the Parliament last month which says that there has been a consistent decline in the participation of investors in the equity market. The survey says, “Shares and debentures accounted for 8.3% of total financial savings in the1980s; their share increased to nearly 13% in the 1990s before declining to 4.8% in the 2000s. The reasons for such a trend could be the behaviour of share prices, as reflected by the Bombay Stock Exchange (BSE) Sensex, and are depicted in the following table.
The sharp increase in the co-efficient of variation shows that there has been a substantial increase in the volatility in the equity market as co-the efficient of variation is a measure of volatility.
Issues related to mutual funds: Mutual funds have been one of the main culprits in driving retail investors away from the market. Mutual funds over a period of time floated schemes which have been completely lacking focus. When the market was on an upswing, these schemes sold like hot cakes but with market sliding, the hollowness of these schemes came to the fore. We do not have even 500 quality companies listed on the stock exchanges in India but there are more than 300 equity schemes. What will act as the differentiator? Why should the regulator permit a fund house to come out with news schemes when the existing schemes have performed pathetically? The objective of a mutual fund scheme is not to grab as much money from retail investors as possible; rather the focus should be providing returns.
Another aspect that reflects poor performance of mutual funds is the inability of fund managers to beat the benchmark against which they operate. It is understandable that in falling market, mutual funds cannot perform a miracle but at least majority of the funds should beat the benchmark index but in India this has not been the case ( Reference: S&P CRISL SPIVA report). Additionally gross mis-selling of mutual funds has been happening all around. Even a noble scheme like RGESS was not spared (High value applications perverting RGESS, while SEBI remains mum). It will become difficult to pitch mutual fund as an investment option for retail investors in future if the trend continues.
Consistently poor corporate governance practice: Hardly a day passes which does not have news on the poor corporate governance practice of companies listed on the stock exchange. Look at the recent incidents of money laundering reported in the leading banks in India. Share price of the three banking companies took a severe beating in view of news related to money laundering. But the problem does not stop here. The stock market is full of examples where share prices have fallen sharply which have taken many investors by surprise. The recent examples of Manappuram and NHPC show how investors were taken off-guard. Real estate companies are an example of how corporate governance practices are completely ignored by these companies, ultimately hurting the interest of investors.
Apart from these, there are various other factors such as poor performance of IPOs (initial public offers), gold providing a good return over a period of time and high rate of return offered by bank deposits and other relatively risk-free assets. There is no denying the fact investments in equity is a must for wealth creation but if the performance of the stock market continues to be as pathetic as it has been in the recent years, retail investors will continue to keep away from markets. There is an immediate need to instill confidence by adopting measures which promotes healthier practices in the companies and financial intermediaries such as mutual funds. Also there is a need to introduce new measures to control the entry of companies in the stock market. Retail investor participation is must for creation of a broad based, stable equity market in India.
(Vivek Sharma has worked for 17 years in the stock market, debt market and banking. He is a post graduate in Economics and MBA in Finance. He writes on personal finance and economics and is invited as an expert on personal finance shows.)
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I am an investor in the share market since last more than 35 years and am comfortable with my old investments. But have lost heavily in fresh investments made in last 5/6 years, including those in MF and IPOs. (Biggest loss was in Raj Oil Mills shares). MF investments, it appears, enrich only their fund managers and employees. I feel, one reason of Companies' shareholders not gaining is the greed of their Directors / employees fattening their pay packets (with no controls from Govt. etc.) & not carrying for their investors.
Besides, regulators like SEBI and RBI have done precious little to boost the confidence of small investors by reviewing and revising their policies, or punishing known offenders like Sahara.
Hence, small investors, like petty / poor criminals, know that the system is loaded heavily against them, and only favours those with deep-pockets.
Volatility: Equities are inherently ‘highly’ volatile. Equity investors must be prepared emotionally for stock prices to fluctuate widely. You cannot invest into equities / equity mutual funds with the mindset of a fixed deposit investor. Equities cannot be expected to fluctuate any less because you don’t like volatility in your portfolio.
Temperament / Mindset : Investing in equity is not everybody’s cup of tea. To invest in equity you need to have a different temperament / mindset altogether. A true equity investor has the temperament to handle with equanimity a substantial fall in prices. Investing in equities is not about sidestepping stock market crashes; it is about withstanding the crash in stock prices with equanimity. This ‘trait’ of a true equity investor cannot be cultivated through any number of investor education programs.
If you have the conviction, falling prices provide a great opportunity to buy more of the stock at lower / bargain prices.
But when will the Indian retail investors understand and act?
One also shd stay far far aware from the tall talk of wealth management companies who since last 2 yrs have always been giving the false impression that boom is round the coenr in Indian equities.The economy is so so down ,boom in the near future is out of the question.
I totally agree with yr rational thoughts which makes total sense sir.Have a nice weekend.