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Ventura Wealth Clients
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Data is the new oil but no matter how much of it we use, if the machinery isn’t in fine fettle, we will still get a defective output. Nowadays, the discussion is heating up in the media pertaining to a rising participation of retail investors in the equity markets.

During the April-June quarter of FY21, more than 23 lakh new accounts were opened. This was about 48% of new accounts added in the entire FY20. Data clearly suggest that demat account opening has taken a vertical shift since lockdowns were imposed and mutual fund inflows have been ebbing out simultaneously.

Demat activity: From matt finish to gloss finish

[caption id="attachment_7341" align="aligncenter" width="222"] #Data upto June 30, 2020
(Source: CDSL,NSDL, Mint)[/caption]

With these data points some media houses are concluding that since many mutual funds have given single digit returns over the past 3 years, investors are losing patience with them. At the same time, a massive bounce back in the equity market, from its March lows, has enticed the new breed of investors to make moolah.

While everybody’s sounding cautious about a sudden jump in the retail participation, nobody seems to be paying attention to the elephant in the room. People might be disappointed with mutual funds but is that the only reason they are now coming directly to the stock market?

Penetration of equity as an asset class is below 5% in India. Therefore, it’s very difficult to take cues from the trends in bank deposits and rise/fall in the savings account balances. However, there’s a possibility that investors are shunning bank deposits (since the interest rates have nosedived) and redirecting that money to stock markets, hoping to make more than what they get in FDs.

And why ignore this possibility?

Some industries, such as telecom and financial services, have been running relatively smoothly during lockdowns. There haven’t been many instances of pay cuts. However, there are quite a few industries that have received a mighty blow from the coronavirus outbreak. There’re pay cuts and job losses.

Isn’t there a possibility that the new breed of investors are turning to equity markets in the hope that they can recoup the loss of income by earning profits in share trading?

There’s no dearth of self-proclaimed experts who directly or indirectly encourage trading as a second stream of income. Thankfully, the regulator and stock exchanges have been advising caution, time and again.

True, India wants more investors to come to the capital markets whether through mutual funds or through the direct route, but nobody would appreciate them leaving the market abruptly and swearing not to come back again. Haven’t we experienced this in the past?

According to a BusinessLine report, more than 75% of India’s demat accounts are inactive. An inactive account is an account that doesn’t register any transaction for a year. In other words, equity is a dead investment for many investors or they have lost interest in it over the period of time.

While our eyes are glued to the number of new accounts opened, we must pay attention to inactive accounts too.

Some big brokers have managed to beat the industry average of demat accounts opened in Q1FY21by a huge margin. Dwell deeper and you will find instances of some companies shutting down their broking business on the onset of COVID-inflicted lockdowns. This highlights the stress at the industry level.

Consolidation on cards?

[caption id="attachment_7340" align="aligncenter" width="511"] (Source: CDSL, NSDL, Company declarations)[/caption]

Busy schedule and lack of advice could be the reasons for high rate of inactive clients. However, can we ignore the fact that many investors lose interest in the direct equity route after incurring heavy losses?

Trading outcomes and emotional states

[caption id="attachment_7333" align="aligncenter" width="946"] For illustration purpose only
(Source: Ventura Securities)[/caption]

If you juxtapose various points discussed above, you will realize this time it’s a combination of desperation, greed, supportive markets and lack of adequate skills. This could be a recipe to disaster. Appreciably, the regulator has been rationalizing norms to discourage unrestrained use of leverage which often leads to unrecoverable losses for many.

More than the rate of commission, frequency and quantum of winning trades in a portfolio matter—which is a function of trading skills and market conditions. Unfortunately, for many, the discussion of choosing a broker begins and ends with the rate of commission.

While we celebrate the growing participation of retail investors, we must be watchful of the bounce rate.

 

You may also like to read: Where to invest now when fixed deposit rates are falling

 

Disclaimer: 

We, Ventura Securities Ltd, (SEBI Registration Number INH000001634) its Analysts & Associates with regard to blog article hereby solemnly declare & disclose that:

We do not have any financial interest of any nature in the company. We do not individually or collectively hold 1% or more of the securities of the company. We do not have any other material conflict of interest in the company. We do not act as a market maker in securities of the company. We do not have any directorships or other material relationships with the company. We do not have any personal interests in the securities of the company. We do not have any past significant relationships with the company such as Investment Banking or other advisory assignments or intermediary relationships. We are not responsible for the risk associated with the investment/disinvestment decision made on the basis of this blog article.

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