PM Narendra Modi said, "In India retail investors are 40 per cent of the total asset class with ₹ 20.44 lakh crore invested by them.
In Indian market, retail investors have always attracted a lot of attention. Retail investors in India are active, and there is good reason why. Retail investors in India have grown from mere ₹ 130 Cr in 1997 to over ₹ 11000 Cr in 2003. Retail Investors holding was around 18% of total market capitalization in FY 22-23 vs. 11% in FY 18-19.
Table of Contents
A) Rising Indian retail investors.
B) 3 Types of Indian Retail Investors
C) 5 Impacts of Growing Indian Retail Investor Base on the Economy
D) 4 Key Drivers for the Rise of Indian Retail Investors.
E) 6 Factors Indian Retail Investors Should be Aware Of.
F) 3 Major Lessons for Indian Retail Investors.
Rising Indian retail investors.
Retail investors now account for around 52 per cent of daily transactions in the market. With DIIs (Domestic Institutional Investor) and FIIs (Foreign Institutional Investors) accounting for 29 per cent and 19 per cent respectively. The equity cult in India is spreading. With 11% holding in BSE. (Source: Market Dashboard. NSE. BSE)
The rise of Indian Retail investors has always been a pro-RBI move. FITCH (FitchRating) believes that retail investors' importance will only increase going forward. And their activity will have an impact on the rupee as well.
3 Types of Indian Retail Investors?
Individuals who invest in the capital market are called RETAILINVESTORS. They are not required to have any special training or qualifications to invest in the capital market. They are responsible for conducting their own research and making their own investment decisions. This can be a daunting task for many, as the capital market can be complex and volatile.
Retail investors are:
1) Individual Investors.
2) HNI's (High net worth individuals).
3) RMF (Retail Mutual fund investors).
The age group of retail investors primarily falls between 22 and 35 years, with an annual income ranging from ₹ 5 lakh to ₹ 30 lakhs. Retail investors in India invest in the capital market on their own risk and knowledge.
Other the other hand Institutional investors (mutual funds, hedge funds, and pension funds) operate on behalf of their clients. These clients may include individuals, corporations, or other large organizations. Institutional investors are often referred to as "big money" due to the large amounts of capital they have at their disposal. They use this capital to make investments in various financial instruments, such as stocks, bonds, and commodities.
1. Individual Investors:
Individual investors primarily constituents of retail investors in India. These are individuals who invest their own money in the capital market for personal gain. They may be employees, entrepreneurs, or self-employed professionals. Those have surplus funds to invest?
Individual investors in India get lured by the potential for high returns and the desire to grow their wealth over time. They invest with the goal of long-term capital gains or regular income.
2. High Net Worth Individuals:
Individuals with at least ₹ 5 crores in investable assets. They have a high appetite for risk. They invest a significant part of their wealth in the capital market. HNIs have portfolios of high risk to reward ratio.
They can further be classified as:
a) Ultra-High Networth Individuals (UHNIs).
b) High Net Worth Individuals (HNWIs).
E.g., Mr. Radha Kishan Damani (Avenue Supermart), Late Mr. Rakesh Jhunjhunwala (Rare Enterprises)
3. Retail Mutual Funds Investors:
Individuals who invest in mutual funds through retail channels can be referred to as retail mutual fund investors. They are usually classified as either conservative or aggressive investors. Their classification depends on their investment style and risk profile.
Conservative investors prefer investments, that provides steady returns with low levels of risk.
Aggressive investors like higher levels of risk to achieve their goal of high returns.
Retail mutual fund investors invest in a variety of asset classes, such as equities (stocks), fixed income (bonds), cash and carry equivalents (liquid funds) and commodities. They also have access to a wide range of funds from different asset management companies. This allows them to diversify their portfolios and reduce their risk exposure.
(Source: AMFI)
Who are Retail Investors?
Ans: Retail investors is a diverse group of individuals who invest in capital market. They include individual investors, high net worth individuals and retail mutual funds investors. As India's economy continues to grow, the number of retail investors will also grow. Providing a boost to the capital market and the economy.
5 Impacts of Growing Indian Retail Investor Base on the Economy
Increase in income and consumption will drive investment. Retail investors have increased their exposure to equity markets by four times in the last five years as per NSE. Retail Investors holding was around 18% of total market capitalization in FY 22-23 vs. 11% in FY 18-19.
Stronger participation from Retail Investors has upticked valuations of Indian equities. As per RBI, mutual funds' net inflows are around ₹ 2800 Cr in the first seven months of FY 22-23. That surpassed ₹ 2000 Cr of FII outflows in that period.
Data shows that Retail Investors were net buyers during each fall in the Nifty50 index over 20% during FY 22-23. This was not the case before 2020, when FII outflows, triggered market panic. Every time FIIs sold, Nifty fell more than 20%.
FII outflows (~₹ 6 lakh crore) in the past year have been compensated for by the increase in retail holdings (₹ 3800 Cr). This is one of the reasons why Indian markets are reasonability stable.
Mutual fund investments by Indian retail investors hit an all-time high of ₹ 401,000 Crore. Mutual funds have delivered a robust performance with an average return of 13% for the past 5 years. (Sources: AMFI).
The Indian stock market witnessed a sharp rise in the volume and number of retail investors over the past few years. This trend is significant as it indicates a growing interest in investing among individuals. A shift in the investment landscape in the country.
1.Growing Investor Base:
The number of retail investors in India has been steadily growing over the years. With more and more individuals opting to invest in the capital market. This growing investor base is a positive sign for the Indian economy. As it indicates a shift towards a more investment-oriented culture.
Retail investors in India have grown from a mere ₹ 130 Cr in 1997 to over ₹ 11000 Cr in 2003.
2. Increase in Trading Volume:
The trading volume in the Indian capital market has seen a sharp rise in recent years. Retail investors account for a significant portion of the volume. This increase in trading volume has led to greater liquidity in the market. Making it more attractive to investors.
(Source: NSE)
3. Boost to the Economy:
The rise in the volume and number of retail investors is a positive sign for the Indian economy. It provides a boost to the capital market. Increased investment in the capital market helps to raise funds for companies. This can be used for expansion and growth. This, in turn, can help to boost the economy.
4.Democratization of Investment:
Rise in volume and number of retail investors indicates democratization of investment. More and more individuals are now able to invest in the stock market. This has been made possible by the introduction of online trading platforms. And the availability of easy-to-understand investment products.
5.Long-Term Investment:
The increase in volume and number of retail investors also suggests a growing interest in long-term investment. This is a positive sign for the Indian economy as it indicates that investors are looking to hold on to their investments for the long-term. This can help to stabilize the market.
What it means for the India's Economy?
Ans: The sharp rise in the volume and number of retail investors in India is a positive sign for the Indian economy. It indicates a growing interest in investing among individuals. Shift towards a more investment-oriented culture. And democratization of investment. The increase in trading volume has led to greater liquidity in the market. These trends will provide a significant boost to the Indian economy going forward.
4 Key Drivers for the Rise of Indian Retail Investors
(A)High growth of online trading platforms
It enabled easy participation of retail investors in the Capital market. With Real-time market data, research reports, trading tools, and a user-friendly interface.
Zerodha saw a remarkable 82% increase in revenue from operations in FY22, reaching Rs 4,964 crore as compared to the previous fiscal year's Rs 2,729 crore, as stated in the company's annual financial statements filed with the Registrar of Companies (RoC).
1.Accessibility:
These online platforms have simplified the investment process for knowledgeable investors, as they no longer have to physically visit the offices of a brokers. Investors can now trade from the comfort of their homes or offices, with a few clicks of the mouse. This increased accessibility has helped attract more retail investors to the market.
2. Cost-Effectiveness:
Online trading platforms have also made trading more cost-effective for retail investors. Traditional brokerage firms charge high fees for their services, which can be a deterrent for retail investors. Online trading platforms charge much less, making trading more affordable for retail investors.
3. Transparency:
These platforms provide investors with real-time market data, research reports, and other relevant information. This helps them to make informed investment decisions. Transparency has increased investor confidence in the market, resulting in more retail investors.
4. Ease of Use:
Online trading platforms have user-friendly interfaces. These platforms are easier to navigate, even for novice investors. These platforms provide investors with a wide range of trading tools. Which helps them analyze market trends and make better investment decisions.
5. Convenience:
Online trading platforms are available 24/7. Making it easy for investors to trade at their own convenience. This helped attract more retail investors to the market. They can now trade at their own pace and at a time that suits them.
6. Greater Control:
Online trading platforms provide investors with greater control over their investments. Investors can monitor their investments in real-time, track their performance, and make changes to their portfolio as required.
7. Education:
Online trading platforms provide investors with access to a wide range of educational resources, such as tutorials, webinars, and blogs. These resources can help investors learn more about the market, develop their investment strategies, and make informed investment decisions.
(B) Wealthy, young and aspirational
With almost a third of the population under the age of 25, India boasts a young and growing economy. But youths have fewer high paycheck jobs. As a result, almost two fifths of the population are underemployed, so they look for alternative ways to earn an income.
The rise of retail investors in India can be attributed to a number of factors, one of which is the increase in wealthy, young, and aspirational individuals. As India's economy continues to grow, a greater number of young and affluent individuals are looking for investment opportunities that can help them grow their wealth.
1. Growing Wealth:
India's economy has been growing at a rapid pace, leading to rise in the number of wealthy individuals. As these individuals accumulate wealth, they are looking for investment opportunities. The capital market is an attractive investment option.
2. Aspirational Young Population:
India has a large young population that is highly aspirational. This generation is tech-savvy. And has access to a wealth of information about investing through social media and other digital channels. They are highly motivated to invest and grow their wealth. Capital market provides them the avenue to do so.
3. Diversification of Investments:
As individuals accumulate wealth, they are looking to diversify their investments to reduce risk. The capital market provides investors with the opportunity to invest in a wide range of companies across different sectors, providing them with diversification opportunities.
4. Greater Investment Awareness:
With the rise of social media and digital channels. There is a growing awareness about investing among young and aspirational individuals. These individuals are taking the time to educate themselves about investing. And are seeking out opportunities to invest their money.
(C) Mutually beneficial funds: Mutual Funds & ULIPs
Mutual Funds and ULIPs (Unit Lined Insurance Plans) are two of the most popular investments in India.
There are over 5000 mutual funds in India, with an Asset Under Management (AUM) of over ₹ 40000 Cr. They have delivered a robust performance with an average return of 13% for the past 5 years. The situation has changed a lot since 2012 when there were fewer than 100 mutual funds. Today this number has touched 300, and there are even more coming up every day.
Rise of Mutual funds can be attribute to; Options for diversified portfolio allocation, Professional management, Low risk, Diversification, Liquidity and Economies of scale.
The introduction of mutual funds and Unit Linked Insurance Plans (ULIPs) in India has been a game-changer for the investment landscape in the country. It has helped to increase the volume of retail investors in India. Providing them with easy access to professionally managed portfolios and diversified investment options.
1.Professional Management:
Mutual funds and ULIPs are managed by professional fund managers who have the knowledge and experience to make informed investment decisions. This has made investing more accessible to retail investors who may not have the expertise or time to manage their own portfolios.
2.Diversification of Investments:
Mutual funds and ULIPs invest in a wide range of companies across different sectors, providing investors with diversification opportunities. This reduces the risk of investing in a single company or sector and helps investors achieve their investment objectives.
3. Flexibility:
Mutual funds and ULIPs offer investors the flexibility to choose from a range of investment options. Which suits their investment goals and risk appetite. Investors can now choose from equity funds, debt funds, hybrid funds, and more. Depending on their investment needs.
4. Tax Benefits:
Mutual funds and ULIPs offer tax benefits to investors, making them an attractive investment option. Investors can claim tax deductions under Section 80C of the Income Tax Act for investments in ELSS funds and ULIPs.
5.Low Entry Barriers:
The introduction of mutual funds and ULIPs has made investing accessible to a wider audience. The low minimum investment requirement has made it possible for even small investors to invest in these funds. The investment amount could be as small as ₹ 500 pm (SIP mode).
(D) Policies & Regulation Bodies:
Mutual Funds and ULIPs are regulated by the Securities and Exchange Board of India (SEBI) and Insurance Regulatory and Development Authority of India (IRDAI) respectively.
In 2016, IRDAI introduced the Systematic Investment Plan mechanism (SIP) for ULIPs to woo retail investors. The popularity of SIPs can be attributed to their user-friendliness, ability to generate steady returns, low ticket size and tax. SEBI is the primary regulatory body for the Indian securities market.
1) Introduction of Demat (dematerialized account) Accounts:
In the past, investors had to hold physical shares of companies. Which were cumbersome to trade and maintain. The introduction of demat accounts by the Depository Participants (CDSL & NSDL) in India made it easier for investors to buy and sell shares. Demat accounts also helped reduce the incidence of fraud in the market.
2. Introduction of KYC norms:
SEBI made it mandatory for all investors to complete the Know Your Customer (KYC) process before investing in the market. KYC norms helped reduce the incidence of money laundering and other fraudulent activities in the market. This increased the trust of retail investors in the Indian stock market.
3. Introduction of IPO norms:
The introduction of Initial Public Offering (IPO) norms by SEBI made it easier for companies to raise funds from the market. IPOs also provided an opportunity for retail investors to invest in the market and become a part of the growth story of the company. SEBI also ensured that the IPO process was transparent and fair to all investors.
4. Introduction of Mutual Funds:
SEBI also introduced mutual fund regulations that made it easier for retail investors to invest in the market. AMFI is a regulatory organization that is composed of asset management companies and fund houses based in India.
5. Introduction of Online Trading Platforms:
The regulatory bodies opened doors for investment platform developers and organizations. The introduction of online trading platforms by stockbrokers made it easier for investors to buy and sell shares. These platforms also reduced the cost of trading and made it accessible to a larger number of investors.
6. Investor Education Programs:
SEBI and other regulatory bodies also conduct investor education programs. They educate investors about the risks and rewards of investing in capital markets. These programs helped increase investor awareness and confidence in the market.
SEBI even formulated NiSM (National Institute of Securities Markets) with this motive.
7. SEBI's efforts to protect investors:
SEBI has also taken various measures to protect investors in the market. For example, SEBI has mandated that all listed companies must have an independent board of directors and an audit committee. This helps ensure that the company is managed in the best interests of shareholders. SEBI has also taken strict action against companies that violate securities laws and regulations. Thus, protecting investors from fraud and other malpractices.
Key Drivers for Rise of Retail Ownership
Ans: Tail-wind of retail ownership growth can be contributed mainly to; growth of online platform, growing wealthy and aspiring youth, introduction and multifold growth of MFs and ULIPs and finally and not the least the policies and regulation bodies.
The present wealthy and aspiring youths have easy and transparency access to diversified options to invest and grow their wealth. And with the 24/7 online access of vast and informative knowledge bank they are at a much place now.
The introduction of demat accounts, KYC norms, IPO norms, mutual fund regulations, online trading platforms, and investor education programs have all contributed to the growth of retail investors in India.
SEBI's efforts to protect investors in the market have also increased investor confidence in the market. These regulatory measures have made the Indian capital market more accessible and transparent.
6 Factors Indian Retail Investors Should be Aware Of
Retail investors in India face several risks and concerns when investing in the capital market. While investing in the capital market can be an attractive opportunity to grow wealth. It is essential for retail investors to be aware of the potential risks and take appropriate measures to protect their investments.
1.FIIs a net seller:
Traditionally the Indian capital market uses FII (foreign institutional investor) net investment/sales, as barometer to check its health. The importance of foreign investor(s) in the Indian capital market is quite well-known. For years it has been considered as a major contributor to its strength and stability. FIIs have played an important role in India's economic development over the years. Helping it earn its place among the world's most promising economies. Also known as multiband issuers (MBIs), FIIs constitute over 60% of all new issues in Indian markets, according to ICAI studies. Their investments have strengthened commercial banks' capital base. Thereby allowing them to lend more freely. It opened new avenues for small businesses seeking inflow of funds. And helped existing enterprises diversify.
From the last 5 fiscal years (FY18-19 to FY22-23), FIIs have been a net seller according to data compiled by CRISIL. In FY19, the net inflow stood at (-) ₹ 2600 Cr. Followed by (-) ₹ 1600 Cr in FY20 and (-) ₹ 900 Cr in FY21. Compared to excess (+) ₹ 400 Cr during the same period of previous years.
Thanks to the contribution of DII’s and Retail Investors, the market is putting up a brave face.
(Source: Moneycontrol)
2.Market Risk:
Market risk refers to the risk of loss due to changes in the stock market. Retail investors in India face market risk due to volatility in the stock market. This risk is heightened during periods of economic uncertainty or market turmoil. Which can lead to sudden drops in stock prices and significant losses.
(Source: NSE-website)
3. Liquidity Risk:
Liquidity risk refers to the risk of not being able to sell an investment when needed. Retail investors in India face liquidity risk when investing in stocks. Which have low trading volumes or are not easily tradeable.
It’s believed that Indian market is highly liquid. But in the case of some specific stocks and more in the case of ETFs liquidity is a big concern still.
4. Concentration Risk:
It refers to the risk of having a large portion of investments in a single stock or sector. Retail investors in India face concentration risk when they invest in a single stock. In a single sector without diversifying their portfolio. This risk can lead to significant losses if the stock or sector performs poorly.
5. Fraud Risk:
It refers to the risk of being scammed or defrauded by fraudulent investment schemes. Investors in India face fraud risk due to the prevalence of Ponzi schemes. And other fraudulent investment schemes.
E.g, Rose Valley, Sardha Case.
6. Regulatory Risk:
Risk of changes in regulations that can affect the value of investments. Investors in India face regulatory risk due to changes in tax laws, trading rules, and other regulations. These can impact the capital market.
What are the Risk Factors that Retail Investors Should be Aware of?
Ans: Retail investors in India face several risks and concerns when investing in the stock market. These risks include market risk, liquidity risk, concentration risk, fraud risk, and regulatory risk. It is essential for retail investors to be aware of these risks. Then take appropriate measures to protect their investments. Such as, diversifying their portfolio, investing in reputable companies, and staying informed about changes in regulations. By taking these steps, retail investors can minimize their risks and achieve their investment goals.
3 Major Lessons for Indian Retail Investors
1)Growing economy.
The capital market of India is growing at an exponential rate. Great time to get into the flow and enjoy better financial returns. Traditionally the liquidity index of Indian Capital market has been consistent. As for the economy, an increase in income and consumption would be witnessed because of investments by retail investors.
2) What is the trend of retail investors in India?
Retail shareholding in Indian companies clocked a near 15-year high in June 2022 (source: NSE). Post-rate hike, retail shareholding still makes up around 9% in both the Nifty 50 and Nifty 500 Index. Investors now have access to professional advice. Which makes them better informed about investing choices. And helps them create an investment portfolio. Which matches their risk appetite and financial goals.
3) Things to Consider before investing.
Investing in the stock market can be a risky endeavor for retail investors. Even after thorough account research and analysis. There is no guarantee that investments will yield positive returns. There are various risks too such as interest rate changes, economic downturns, geopolitical events. They must be aware of the potential risks associated with their investments and make informed decisions.
It is important to understand both liquidity and market risks. So, they can make informed decisions when it comes to investing in financial markets. The Indian equity markets are known for their high levels of liquidity. Which makes it easy for retail investors to enter and exit investments with limited costs. However, market risks remain a concern for retail investors. As there is no guarantee that investments will yield positive returns. While there is an increase in the number of individual and retail investors in India. It still lacks strength and confidence amongst them. These investors tend to invest in high risk/volatility, illiquid assets. Because they lack knowledge about other investment avenues like NFOs and Mutual Funds.
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Well said. But, do also comment on the latest SEBI statement, "99% of retail investors make loss".
Well written
Informative
To the point. Hope with some stability in the market the retail investors can grow their wealth too