Retail participation in equity market has witnessed a substantial evolution in last few months. According to various analysts, retail investors have started preferring equities as an investment option over the traditional savings options and small savings schemes. Strong macroeconomic fundamentals and various government reforms have strengthened investor confidence, prompting them to participate in the equity market.
Around 59.1 million retail investors are estimated to have invested in equities as of July 2017, either through stock market or through mutual fund route. The interest of retail investors in equities has led to a 22 per cent rise in the benchmark indices since November 2016. Recent ratings upgrade by Moody's, which serves as an endorsement of the steps taken by the government to shape up the economy for a long haul, is expected to change FII stance towards the Indian equity market.
The market has also witnessed substantial inflows via the mutual funds route. MFs pumped in a net of Rs 102,810 crore in equities – over three-fold increase over Rs 29,374 crore that flowed in during the same period last financial year (CY16). All this has helped the bull run in equities and lifted the indices to all-time high levels.
Evolving retail investors
While increased participation of retail investors in equities is a significant development, an equally noteworthy improvement is their changing mindset towards equities. They have become matured in the way they invest and are more aware of the potential that equities offer along with the associated risks.
Wisdom: Investors are no longer indulging in reckless investments just to make quick bucks from market movements. They are exercising due diligence and are mostly diverting their surplus funds into stocks. Those who find the stock market intimidating are investing through mutual funds via SIPs to include equities in their portfolios. Improved discipline in retail investing is evident from the fact that in FY-18 so far, the industry has added about 8.32 lakh SIP accounts each month with an average size of around Rs. 3,200 as compared to 6.26 lakh SIP accounts added each month on average in FY-17.
Awareness: Another sign of maturity of Indian retail investor is the rising awareness that fixed asset investments are not sufficient for wealth creation. With fixed deposits offering single-digit returns, real estate sector experiences price stagnation and gold purchases facing regulatory curbs, the investors are flocking towards equity market which happens to be regulated, transparent and liquid market. New investors prefer professionally-managed mutual funds, while seasoned investors are allocating a certain portion of their investible surplus into stock markets.
Participation: Various investor education initiatives undertaken by the stock exchanges, broking houses and fund houses have also led to increased participation of investors from tier 3 and tier 4 cities. Demonetisation was partly responsible for the rise in investment from these cities. Banks and AMCs capitalised on the cash ban in these cities to channel investor savings into rewarding financial instruments. Rising awareness about investment opportunities beyond traditional investment avenues and tax benefits in equity-linked instruments also contributed to bringing about this shift.
Equities to remain a great investment destination
Over the next 3- 5 years, Indian equities are expected to remain one of the best investment avenues for retail investors. Measures taken to stimulate growth and development across sectors would ensure that long-term performance of equity market would remain positive. Moody's rating upgrade is an affirmation of the same.
Good monsoon for consecutive year is expected to drive rural economy while the pay commission awards would kick in urban consumption. Implementation of GST impacted sales volumes in the early part of the transition period, but as the system got versed with the new tax regime, volumes are back to normal, which is reflected in Q2 earnings.
Corporate earnings are expected to revive from the second half of FY18 on the back of demand revival supported by rural and urban consumption recovery. Government reforms are marginalizing the informal economy and will improve the tax-to-GDP ratio over the next couple of years. Tax inflows into government exchequer will increase spends on development projects. NPAs on the books of banks are being tackled with the help of the Insolvency and Bankruptcy Code (IBC), thus ensuring that the resolution is being put in place in time bound manner.
Through initiatives such as Skill India, Digital India, and various infrastructure projects, the government is leaving no stone unturned to ensure new jobs are created to eventual fuel consumption led demand. This strategy will improve the capacity utilization to kick in the private capex which has been the only missing link in the India growth story. In the backdrop of these developments, equities could be an excellent investment option for the 3-5 years horizon.
Sound strategies for equity investment
The rising adoption of equities as an investment option is a healthy sign for the economy. With markets touching new heights and positive sentiments surrounding stock markets, the retail investors still sitting on the fence want to participate in this growth story. In this buoyant market, a retail investor should keep the following strategies in mind to make wise investment decisions:
Long-term horizon: Economic and business cycles are generally believed to last for five-seven years. It would be futile to get perturbed and create panic on short-term market movements. It is interesting to observe that most retail investors who lost money in stock markets indulged in trading and not in long-term investing. To give a perspective, Sensex has given 333 times returns in the last 38 years, and 8 times in the last 17 years. This clearly indicates that while investing in equities offer inflation-beating returns, they do so over a long-term horizon.
Consistency in performance: Strong inflows and exuberance in equity markets have resulted in high valuations of stocks which makes it imperative for investors to exercise caution while investing. For novice investors, it would be a wise strategy to check the consistency in the performance of a stock before including them in their portfolio.
Identify well-rounded stocks: Short-term returns offered by a particular stock are not an indicator of its potential to deliver good returns in future as well. Invest in companies that have a vast business opportunity available to be tapped and are managed by a capable and visionary management. The ability of a business to withstand the perils in past will ensure its longevity which in turn will lead to growth and higher earnings in future.
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