Retail stock investments will pay off only if investors stay invested

The search for higher returns has led to stock markets rallying big time, attracting many newer investors. (REUTERS)
The search for higher returns has led to stock markets rallying big time, attracting many newer investors. (REUTERS)

Summary

  • India has seen major inflows into shares bought expensively that must now be held for long periods

In late September, the National Stock Exchange (NSE) announced that the number of unique registered investors with it had crossed 80 million (counting unique permanent account numbers). The count of unique registered investors had crossed 50 million only in late October 2021, so we had a 60% jump in less than two years. Further, the jump from 70 million unique registered investors to 80 million took around eight months. This suggests that Indians have taken to stock market investing like never before. This raises several important points.

First, conventional wisdom has it that over the years, investing in stocks is something that is limited to Mumbai and other bigger cities, apart from the state of Gujarat. But that’s no longer true. In fact, 45% of the new investor registrations of the last 10 million unique registered investors came from beyond the top 100 cities. Also, India’s 80 million unique investors correspond to around 50 million unique households or around 17% of Indian households. So, one in six homes can now buy stocks if they want to.

Second, the increasing interest in stocks is visible in other data points as well. The number of demat accounts—which are required for buying and selling stocks—has gone up at an astonishing pace over the last few years. In December 2019, before the pandemic had broken out, the number of demat accounts stood at 39.4 million. As of September, the figure had jumped to 129.7 million, implying that close to 70% of demat accounts in existence have been opened in less than four years. Of course, as the NSE data suggests, around 80 million of these accounts are unique, given that individuals tend to have multiple demat accounts.

The household financial savings data suggests that the flow of money into stocks has been growing over the years. In 2018-19, it stood at 63.8 billion. This jumped to 385.3 billion and 486.1 billion in 2020-21 and 2021-22, respectively. In 2022-23, it stood at 230.4 billion. A similar jump can be seen in the net investment in equity mutual funds, which invest a bulk of the money they collect in stocks.

Third, much of this jump is possibly a function of the times we are in. In the last few years, opening a demat account has become much easier than was the case before. Also, the user-interfaces of some of the newer stock brokerages are much friendlier than those of the legacy stock brokerages backed by banks. The entire process of buying and selling stocks is now less intimidating than it used to be.

Further, interest rates fell sharply in the aftermath of covid, pushing people towards investing in stocks, in search of higher returns. Also, the work-from- home phenomenon made it easier for people to trade in stocks, something that may not have been possible if they continued going to their offices regularly.

Fourth, the search for higher returns has led to stock markets rallying big time, attracting many newer investors. This explains why the flow of retail money into stocks was very high in 2021-22, when the price-to-earnings ratio of the 30 stocks that make up the BSE Sensex, India’s premier stock market index, stood 29.5, the highest it has ever been, looking at data which goes back to as far back as 1998-99. The net investment into equity mutual funds in 2021-22 stood at 1,644 billion, the highest it has ever been. Clearly, many retail investors bought stocks—directly and indirectly—when prices were at their peak. Now, hopefully they will stay invested for a while to be able to draw decent returns from their investment.

Fifth, the rise of finfluencers selling courses that promise to teach investors how to become rich quickly by trading in stocks could also explain this rising interest in stocks over the last few years.

Sixth, the recent rally in small cap stocks may be a short-term reason for the rising interest in stocks. Nothing gets a retail investor interested in shares more than good recent performance.

Seventh, this increased interest in stocks has helped foreign institutional investors. In the past, when they sold out, stock prices fell. But with more retail investors ready to buy stocks, it isn’t the same this time around. Between August-end and 9 October, foreign portfolio investors have net sold stocks worth 225 billion or $2.7 billion. But stock prices barely reacted to this. The BSE Sensex has moved up by 1.1% during the period. The trouble is that sections of the TV media are portraying this as the power of our retail investor. Now, that’s a good spin. But whether it turns out to be true depends on how soon foreign investors stop selling. Their sustained selling—mainly due to rising interest rates in the US—will eventually have an impact.

Finally, over the years, Indian investors at an aggregate level have been too heavily invested in real estate, gold, fixed deposits, small savings schemes and insurance schemes. This recent rise in stock investing is thus a welcome trend, given that it aids diversification, at least at the aggregate level.

Nonetheless, a lot of this new money in stocks has come in at very high valuations, and so these investors now need to stay invested for a sustained period in order to hopefully make some good money at the end of it.

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