I was recently asked to share my thoughts on “How do you increase equity/bond market participation in India?”. I figured the best way to collect my thoughts was to write an article about it.
Financial inclusion typically means enhancing the reach and deliverability of financial services to reduce inequality. So, by aiming for enhanced capital market participation among the lower-income group, we hope they stay invested over the long term and, at least, change their social station over 2-3 decades or perhaps two generations.
This change in social stations is already happening without the help of equity investing. How many maids, roadside ironers, plumbers, painters, electricians, etc., around us have shed blood, sweat and tears and helped their children secure high-paying white-collar jobs?
So the question is, can capital market participation, at least from the second generation, secure their long-term finances and further enhance the lifestyle of future generations? Certainly, but there are steep challenges to overcome.
With the emergence of smartphones, the United Payments Interface (UPI), online KYC, Aadhaar e-signing, user-friendly apps, and capital market participation have sugared over the last few years.
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In FY 2010-11, only 3 lakh new demat accounts were opened, making the total number of accounts 190 Lakhs (19 million). By FY 2020-21, new accounts surged to 10.7 million and total accounts to 51.5 million—source: LiveMint. By Dec 2023, total accounts increased to 139 million! Source: BusinessStandard.
According to the AMFI, “The AUM of the Indian MF Industry has grown from ₹9.03 trillion as of January 31, 2014, to ₹52.74 trillion as of January 31, 2024, around six-fold increase in 10 years. The total number of accounts (or folios as per mutual fund parlance) as of January 31, 2024, stood at 16.96 crore (169.6 million), while the number of folios under Equity, Hybrid and Solution-oriented Schemes, wherein the maximum investment is from retail segment stood at about 13.57 crore (135.7 million).” So retail accounts for about 80% of the folios.
That is fantastic. However, that has coincided (as it always does) with a huge uptick in the stock market. I would wager that about 7 in 10 MF/stock investors are new participants who have not witnessed a sustained bear market from 2009 to 2013 or for much of the 1990s.
This growth will likely dry up and, worse, turn negative when (not if, when, as it is inevitable) that happens. At the time of writing, many investors were jittery about high market valuations and feared a crash. They have stopped SIPs and are “waiting” for a “better” time to invest. Such gymnastics is detrimental to building wealth.
So, one of the primary challenges of financial inclusion in capital markets is education and awareness of risks and ensuring investors have moderate expectations, do not commit money into the market for short-term needs and stay invested through ups and downs for long-term goals.
In my experience, many market participants enter looking at the last 1-3 years’ returns and expect the same for the next 1-3 years. They head for the door if things do not pan out that way.
Preparing investors on investors on the true nature of stock market returns and dispelling wrong expectations would go a long way toward effective financial inclusion. For example, a 44-year Sensex return is 17%, but half came from just four years!
Some criticise this stand, (effectively) claiming, “If we tell the truth, it will discourage people!”. I beg to differ. If we wish to increase market participation and use it as a tool to achieve financial inclusion, the AUM has to be “sticky”. We should help investors stay invested through thick and thin, not with false hope but with the truth. That is the most effective way to change the social situation of a family for generations to come.
While investors often stop investing and pull when the returns dry up, they often redeem even during a bull run because they need money to fund emergencies and other needs.
Therefore, financial inclusion via capital markets should take a holistic approach and urge market participants first to build a robust emergency fund to minimise redemptions.
The lack of sustained investible sums is another reason investors fail to grow wealth from the market. Debt, especially loans from neighbourhood sharks with huge interest rates, is a big problem.
Technology-based financial inclusion is a double-edged sword. Just as it is easy to open bank accounts, demat accounts or MF folios, it is easy to spend, borrow and spend more.
Therefore, education on the impact of inflation on our expenses and why finding a balance between spending and saving is crucial whenever possible.
One of my long-standing goals is to develop a tool to evaluate an investors risk awarness (not appetite – that can’t be measured easily IMO) and assign a risk quotient score. See: How do you choose mutual funds with a moderate risk appetite?
How about the bond market? How do we increase retail participation there? Unlike the equity market, where everyone acknowledges the risks (even if they don’t fully appreciate them), the bond market can be pretty shocking to most investors—sudden price swings due to expected rate movements and crashes due to credit rating changes. We will have to take baby steps here and increase participation in government bonds (at least buy and hold). See: Why the NPS should allow the purchase of government bonds for pension.
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