The retail rush

Retail investors have been returning to equity mutual funds and the cash markets, but it’s too early to say the trend is here to stay

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After refusing to be wooed by tax breaks, discounts on PSU shares, and a variety of other sops, retail investors have been thronging back to equities in the last one year. 2015 was a record year for inflows into equity mutual funds. Industry data shows that the number of retail investor accounts (folios) for funds hit 4.37 crore by end December, a 13 per cent surge from a year ago. Stock exchanges have also been reporting a surge in retail activity with the BSE seeing its registered investor base crossing 3 crore and NSE reporting a 11 per cent increase in its cash market turnover. But it is premature to pop the champagne corks and conclude that Indian investors have finally swapped their obsession for physical assets such as gold and real estate in favour of equities for good.

Significantly, these investors did not begin to invest in equity mutual funds or dabble in the cash markets in 2013, when valuations were lower and equities far more attractive for purchase. It was well after stock prices registered big gains in the bull market of 2014 that retail investment began to pick up. This was a period when gold slumped and the property market began to stall. So it is hard to conclude that retail investors have really abandoned their return-chasing behaviour. They may simply have invested in equities because these were the assets with the best return profile in the immediate past. Given this, the question as to whether retail investors have been won over to equities can be answered only some months from now. Stock prices are whipsawing, with both the Sensex and major equity funds sporting double-digit losses for one year, and it remains to be seen what impact this has on retail investors. Also, we tend to overlook that investor counts for stocks and equity mutual funds, even at 3 and 4.4 crore respectively (with significant overlaps), remain abysmally low. That 20.5 crore savers have signed up for the Pradhan Mantri Jan Dhan Yojana in 18 months shows that simple KYC norms can attract new investors into financial assets. Financial firms must take this cue to simplify their on-boarding processes. Not all Indian savers, given low income levels, can afford to take on equity risks. Today, the menu of fixed income options available to savers is extremely limited, and consciously needs to be expanded beyond bank deposits and post office schemes.

Finally, to gauge the true level of retail investor participation in Indian markets, the quality of data needs to improve vastly. It is well-accepted that both mutual fund folios and demat account numbers are heavily overstated due to multiple accounts. Using PAN data to arrive at the genuine investor counts shouldn’t be difficult at all. Policymakers should get down to this before jumping to any conclusions on our retail saving propensities.

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