Are retail investors earning enough
The Indian retail investor is getting poorer. This is not good news. But the evidence is irrefutable, notwithstanding the fact that we have perhaps the best regulatory system in the world, one of the most educated and enlightened finance ministers, a good equity cult and a booming economy.
The evidence is in the last RBI report. It says that only about 1.4% of retail assets are in equities or related instruments. The remaining 98.6% of assets is predominantly in fixed income instruments, life insurance, real estate, gold, etc.
Fixed income/life insurance yields a nominal return of 5-6% per annum, with returns from bank deposits being taxable. Returns in the case of gold, silver and real estate would not be significantly better if we ignore the recent run-up and look at a longer period of one or two decades.
The only asset class that has yielded 18-20% p.a. is equities. On a weighted average basis, our retail investor is not earning more than say 7-8% in nominal terms. Our economy has been growing in real terms at 7-8% and in nominal terms at 12-14% p.a.
Agriculture, with land as a limiting factor, cannot deliver more than 2-3% p.a. growth and therefore, industrial and services sector represented mostly on the bourses, can deliver nominal earnings growth of 20-25% p.a. I, therefore, would like to argue that our retail investor is getting poorer as his/her wealth is decaying in relative terms.
Let us analyse this a bit more. In the past 18 months, we have seen an unprecedented flow of funds into our stock markets. During the same period, the shareholding of typical retail investors has been falling almost continuously.
While there has been some supply of additional paper through IPOs, FIIs and mutual funds have been able to increase their shareholding in blue-chip companies only at the cost of small retail investors (classified as public in most shareholding pattern tables). In general, promoters have also maintained or increased their stakes.
Now that the market has run up over 50% in one year and 200% in the past three years, everybody can see that FIIs and funds have made a huge profit on their investments in India.
Why does the retail investor shun the capital market? Many retail investors burnt their fingers in the previous bull run and would have sworn never to return to the market. Today, I think, media and regulators, albeit working with good intentions, could be causing impediments to the growth in the equity cult.
From government to media to regulators, everybody talks about shielding retail investors from the ills of the equity markets. In effect, they have been successful in shielding him/her from the boons and bounties of the equity markets as well.
I have no doubt that Sebi has done a commendable job of creating a healthy environment in the market. Recently, Sebi has been able to nip in the bud quite a few scams, including price rigging of Z stocks and misuse of retail quota through fake DP accounts in the IPOs.
However, the problem arises because of the media hype created around such examples. If we highlight excesses of any system, people will tend to lose confidence in the system itself. On the whole, capital markets have been functioning fairly well. Although it is important to control such incidences, their relative importance should not be exaggerated.
Also, a number of media correspondents had started warning about possible scams and bubbles just because the sensex touched 6000 or 7000 and did their bit to scare away retail investors. Unfortunately, media revels in scare mongering. Many of them are actually not qualified or experienced enough to take a judgmental call, but they do write with authority.
In India, the retail ownership of equity assets is probably amongst the lowest in developed or developing countries. This should be a wake-up call for our government, as well as for all authorities and bodies associated with the capital market. Is it not that we have got the best regulatory system, but do we want the most effective regulatory system to work as the most effective disciplinary system?
Nirmal Jain, MD, India Infoline
Source: Economic Times
The evidence is in the last RBI report. It says that only about 1.4% of retail assets are in equities or related instruments. The remaining 98.6% of assets is predominantly in fixed income instruments, life insurance, real estate, gold, etc.
Fixed income/life insurance yields a nominal return of 5-6% per annum, with returns from bank deposits being taxable. Returns in the case of gold, silver and real estate would not be significantly better if we ignore the recent run-up and look at a longer period of one or two decades.
The only asset class that has yielded 18-20% p.a. is equities. On a weighted average basis, our retail investor is not earning more than say 7-8% in nominal terms. Our economy has been growing in real terms at 7-8% and in nominal terms at 12-14% p.a.
Agriculture, with land as a limiting factor, cannot deliver more than 2-3% p.a. growth and therefore, industrial and services sector represented mostly on the bourses, can deliver nominal earnings growth of 20-25% p.a. I, therefore, would like to argue that our retail investor is getting poorer as his/her wealth is decaying in relative terms.
Let us analyse this a bit more. In the past 18 months, we have seen an unprecedented flow of funds into our stock markets. During the same period, the shareholding of typical retail investors has been falling almost continuously.
While there has been some supply of additional paper through IPOs, FIIs and mutual funds have been able to increase their shareholding in blue-chip companies only at the cost of small retail investors (classified as public in most shareholding pattern tables). In general, promoters have also maintained or increased their stakes.
Now that the market has run up over 50% in one year and 200% in the past three years, everybody can see that FIIs and funds have made a huge profit on their investments in India.
Why does the retail investor shun the capital market? Many retail investors burnt their fingers in the previous bull run and would have sworn never to return to the market. Today, I think, media and regulators, albeit working with good intentions, could be causing impediments to the growth in the equity cult.
From government to media to regulators, everybody talks about shielding retail investors from the ills of the equity markets. In effect, they have been successful in shielding him/her from the boons and bounties of the equity markets as well.
I have no doubt that Sebi has done a commendable job of creating a healthy environment in the market. Recently, Sebi has been able to nip in the bud quite a few scams, including price rigging of Z stocks and misuse of retail quota through fake DP accounts in the IPOs.
However, the problem arises because of the media hype created around such examples. If we highlight excesses of any system, people will tend to lose confidence in the system itself. On the whole, capital markets have been functioning fairly well. Although it is important to control such incidences, their relative importance should not be exaggerated.
Also, a number of media correspondents had started warning about possible scams and bubbles just because the sensex touched 6000 or 7000 and did their bit to scare away retail investors. Unfortunately, media revels in scare mongering. Many of them are actually not qualified or experienced enough to take a judgmental call, but they do write with authority.
In India, the retail ownership of equity assets is probably amongst the lowest in developed or developing countries. This should be a wake-up call for our government, as well as for all authorities and bodies associated with the capital market. Is it not that we have got the best regulatory system, but do we want the most effective regulatory system to work as the most effective disciplinary system?
Nirmal Jain, MD, India Infoline
Source: Economic Times
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