The Retail Indian Investors Do Not Benefit From the Stock Market

(C) Dr. Tejinder Singh Rawal

Retail Investors Fail to Take Advantage

Successful investing requires a thorough understanding of investment philosophy. It requires discipline not to waver from the course when things are not happening the way you want them. This mental make-up is missing from most investors in the Indian market. Successful investors like Benjamin Graham, Philip Fisher, and Peter Lynch wrote great books on investments; but the Indian investor finds many of the principles enumerated there difficult to apply into the Indian context. Our stage of development is different, our business models are different, and applying the same principles to the Indian scenario is fraught with perils. We need to change them to make them work in our environment. High Household Savings: I am saddened to look at the status of retail investors in India. The Indian household savings rate, which is at 30%, is perhaps the highest in the world. I wish a large part of this savings went into equity. If they did, it would translate into higher corporate growth and could contribute to the growth of GDP. Most of the savings go to low-income-yielding government bonds, bank deposits, real estate, or worse, gold and silver. Invested in equity, this money could grow, helping one meet life goals and retire comfortably. Few do that; the participation of retail investors in Indian equity is ridiculously low. Indian indices have performed well over the years, yet the fruits of development have not accrued to retail investors. Indian markets have benefited institutional investors, domestic and international. Painful statistics: In a population of 130 crore people, there are only 2 crore investors. Less than 2% of the population. How can one expect the people of a country to reap the fruits of progress if they don’t take part? Compare this to the USA, where 60% of the households own stocks. Of the 2 crore investors, 80% are in 10 cities, which means that except for a few people in top cities in the country, no one else is buying stocks. If you probe further, you’ll find the picture grimmer. The real long-term investors are just a fraction of this 2 crore. Most of the ‘investors’ are not investors in the true sense of the term; they are speculators and day traders, out in the market for making a quick buck. India is a success story of inclusive growth in many areas. The best example is the telecom sector. Indians own 750 million mobile phones. Almost every family, however poor it may be, has access to telecommunication. I wish the same revolution takes place in investment. India, with its high domestic savings, has a potential to rise to the top of the chart, if the savings get channelled the right way and the fruits of development become available to every person in the country. ₹100 invested in government bonds for 20 years at a compounding rate of 6% per annum will grow to ₹320 before adjusting for taxes. Reduce taxes, and the amount will be much lower. Take into consideration the rate of inflation, and you’ll soon realise you have been taken for a ride. Your money has grown only marginally if the rate of inflation has been low; if the inflation rate is higher, perhaps inflation has eaten into your capital, and what is left is less than what you have invested. Equity has been growing historically in India at 13—14% per annum over a 20-year window. The amount of ₹100 invested in equity over the same period will have grown to ₹1,150 (taking 13% compounding). With the tax incidence on equity being much lower and applicable only at the point of exit, you can appreciate the difference between the two kinds of investment. The Indian market is marked by the overwhelming presence of speculators. This is so in more advanced markets also, but those markets have matured to the next level of maturity and have a small yet formidable group of successful investors. These are the people who have written success stories of those markets. Does this leave you in an undesirable situation? No, an investor is more likely to be successful amid all the noise and irrationality that prevail in the market. Chaos is an opportunity for a systematic investor. Indian retail investors need to learn the systematic investment strategies. They need to invest regularly and stay invested for a long period of time. They need to understand that short term speculation does not make money, buying equities for long does. (Dr Tejinder Singh Rawal is the author of Loads of Money: Guide to Intelligent Stock Market Investing: Common Sense Strategies for Wealth Creation)

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