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    How to bring retail investors into the stock market

    Synopsis

    Too few distributors and too little knowledge are all stopping small investors from enjoying the market highs, says Nilesh Shah.

    The Sensex and Nifty are within striking distance of all-time highs. The equity market is witnessing record volumes daily. Equity assets under management of mutual fund houses are soaring. Systematic Investment Plans (SIP) in mutual funds have crossed the one crore milestone. IPOs are oversubscribed multiple times. While concerns about market valuation remain, there is no reason to worry about business fundamentals. Equal credit for this happy picture goes to the good work done by Sebi, exchanges and market participants over the years. However, has the retail investor benefitted from it at all?

    The good times now are being enjoyed by foreign investors, Indian promoters and high networth individuals (HNIs). There is little enthusiasm for wealth creation among retail investors unlike in 1991, 2000 or 2008. Equity ownership of retail investors has fallen over the decades even if you take into account their investments in mutual funds, Ulips and the NPS.

    Equity markets have performed better than most other asset classes. The Sensex has roundly beaten returns from some marquee properties in Mumbai since inception. Regulatory oversight in the equity market is rare. You can’t photo-shop performance of mutual funds but you can pass off a drain as a lake in a real estate ad. Financial education is available for anyone keen to learn. So why is retail participation in the capital market still much lower than what it should have been? Let’s discuss some of the possible reasons.

    Absence of a level playing field
    There is a regulatory arbitrage between equity markets vis-à-vis other asset classes. For instance, you can buy gold without any KYC or paperwork. Gold can be bought in cash and outside the tax net. Sellers make margins, which aren’t capped by law. There is no income tax scrutiny if you purchase gold worth more than Rs 2 lakh.

    In realty, cash is still a large component of many deals. Like gold, there are no caps on the high margins. Many real estate projects are sold with guaranteed rental yield or price appreciation. The sales pitch is aggressive to lure retail investors.

    Then there are the Ponzi schemes offering high incentives and returns. None of this is possible in mutual funds or equity markets. The ease of investment in gold and real estate is pulling money away from equity markets. The solution lies in bringing the two under Sebi’s jurisdiction.

    Poor distribution base
    There are millions of people selling real estate, gold and Ponzi schemes. The number of people actively selling mutual funds in the entire country is less than the number of jewellers or real estate agents in any city. It is not uncommon to see financial products distribution setups shutting shop in downturns. Lower margins hinder development of a strong distribution base.

    Multiple products and too little financial education
    People invest based on trust. Banks and insurance companies enjoy greater trust due to the implicit backing of the government. Equities and mutual funds are volatile but reward long-term investing.

    Many people confuse trading and investment because of poor financial understanding. A large number of stocks and IPOs also confuse investors who don’t do enough research or have the maturity or time horizon to withstand volatility. Even in mutual funds, multiple schemes can be confusing.

    Lack of appropriate financial savviness makes retail investors buy in greed and sell in fear.

    All is not lost though. A journey well begun is half done. Sebi and market participants have made a great start. Hopefully, the benefits of equity investing will reach retail investors with the removal of impediments mentioned above to convert India from a nation of great savers to great investors.

    (By Nilesh Shah, Managing Director, Kotak Mutual Fund)

    Also read: Why you shouldn't be scared of investing in equity despite volatility

    Also read: Life is never a straight line, nor are returns from stocks

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