The financialisation of economies has not ended well, even for advanced economies. The global financial crisis of 2008 is an obvious example. Developing countries face debilitating crises when financial market ‘innovations’ and growth run ahead of economic growth. Therefore, India needs to have an orderly and gradual evolution of the financial market, highlighted the Economic Survey 2023-24 which was tabled on Monday.
It stated that all stakeholders – market participants, market infrastructure institutions, regulators, and the Government must ensure that capital markets play their theoretically assigned role of directing savings to their most productive investments. It is not just in the national interest, it is an act of self-interest, too.
The Indian capital markets have seen a surge in retail activity through direct (trading in markets through their accounts) and indirect (through mutual funds) channels in the last few years. The individual investor’s share in the equity cash segment turnover was at 35.9 per cent in FY24. The number of demat accounts with both depositories rose from 1,145 lakh in FY23 to 1,514 lakh in FY24.
The impact of this influx of individual investors in the market is also reflected in new investor registrations with the exchanges, their share in total traded value, net investments, and ownership in the listed companies.
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The registered investor base at NSE has nearly tripled from March 2020 to March 2024 to 9.2 crore as of 31 March 2024, potentially translating into 20 per cent of the Indian households now channelling their household savings into financial markets.
The number of unique tax IDs registered on the NSE rose from 2.7 crore in FY19 to 9.2 crore in FY24. The enhanced participation of retail investors in the Indian capital market is hugely welcome and lends stability to the capital market. It has also enabled retail investors to earn higher returns on their savings.
Most of the new retail investors are likely young and may have a higher risk appetite. It is also reflected in the interest that retail investors have shown in derivatives trading, especially expiration-day trading. While derivatives are hedging instruments, they are mostly used as speculative instruments by investors worldwide. India is likely no exception, said the survey.
Derivatives trading holds the potential for outsized gains. Thus, it caters to humans’ gambling instincts and can augment income if profitable. These considerations are likely driving active retail participation in derivatives trading. However, globally, derivatives trading loses money for the investors, for the most part.
Raising investor awareness and continuous financial education is essential to warn them of the low or negative expected returns from derivatives trading. A significant stock correction could see losses that are more considerable for retail investors participating in capital markets through derivatives, the economic survey highlighted.
Investors’ behavioural response would be to feel ‘cheated’ by unseen more considerable forces. They may not return to capital markets for a long time. That is a loss to them and the economy, the survey added.
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Increased MF participation
A rise in retail participation was more substantial and steadier through the indirect channel via mutual funds. FY24 has been a spectacular year for MFs as their AuM of the MFs increased by Rs 14 lakh crore (YoY growth of 35 per cent) to Rs 53.4 lakh crore at the end of FY24, boosted by mark-to-market (MTM) gains and expansion of the industry, the survey highlighted.
The total number of folios increased from 14.6 crore at the end of FY23 to 17.8 crore at the end of FY24. Barring income debt-oriented schemes, all categories of MF schemes witnessed net inflows. Inflows into growth/equity-oriented and hybrid schemes accounted for more than 90 per cent of net inflows into MFs. Among the passive schemes, exchange-traded funds (ETFs) (other than gold exchange-traded funds) witnessed a 37 per cent rise in net assets in FY24.
The MF segment presently has about 8.4 crore systematic investment plan (SIP) accounts through which investors regularly invest in schemes. Annual net SIP flows have doubled in the last three years, from ₹0.96 lakh crore in FY21 to Rs 2 lakh crore in FY24, the survey further stated.
Total SIP AuM is approximately 35 per cent of the AuM of the MF industry for equity-oriented schemes. This has pushed up ownership of MFs in Indian equities to 9.2 per cent as of 31 December 2023, compared to 7.7 per cent as of 31 December 2021.
