This topic may not look relevant right now but that’s the reason I am touching this. Bw these days I am reading “Shiva Trilogy” by Amish Tripathy so I picked the word ‘Rule’ 🙂
As per a SEBI survey conducted between 2015-2018, more than 95% of investors prefer FDs compared to mutual funds and stocks for investment.
As per AMFI’s data in 2018, less than 1.5% of Indians invest in mutual funds.
A part of these investors would be investing in Equity mutual funds. Of course, the awareness campaigns and investor education programs by MFs have increased the number of MF investors but the number is relatively small.
So why do investors shy away from the equity markets when equity is supposed to give the best returns? (Hmmm best returns)
Few Reasons Equity is Still Avoided
There may be many reasons but I am just touching 4 right now & leaving the comment section open for you to add a few more…
Investors are scared
Investors are scared of investing in equity as there are no guaranteed returns. They do not want to lose their hard-earned money. There have been many instances where retail investors have lost money due to volatility, stock market crashes (including covid-19) and scams like Harshad Mehtastill haunt.
Many stories of people losing money in the stock market go around which paints a negative picture of stock investments.
Knowledge Vs Herd
Many investors lose money because they do not make informed purchase and sell, decisions. Many investors follow the herd and when they see the markets rising, they buy stocks. When there is a fall in the Sensex or NIFTY, people panic and sell-off their stocks/Mutual Funds.
They enter and exit the market at the wrong times, which is fundamentally wrong. Even if when one doesn’t understand the valuation of the company, company prospects, market conditions and have a target selling price before investing in any stock – at least don’t follow the herd.
This may not help in increasing one’s chances of getting better returns but at least you will not be underperforming markets.
Check – How Herd Mentality Harms You
Lack of information and over-relying on tips and analysts
The larger institutional investors sometimes may have access to accurate & raw information. They get news earlier as well, and they use it to benefit from the stock market. Retail investors are not privy to such information and end up losing opportunities or make the wrong decisions.
Apart from this, they invest based on tips from friends and neighbors which can lead to losing money. The market analysts on TV and websites are not always right. They can be wrong or sometimes even biased & many of the times misleading intentionally. Retail investors who follow these experts blindly can lose money.
The only way to be assured of capturing the full permanent return of #equities and investing is to ride out every day of their temporary declines. It is simply not possible for anyone consistently to gain a timing advantage over the market by going into and out of it.
— Hemant Beniwal, CFP (@hemantbeniwal) May 16, 2020
Yes, we do hear about people making lakhs of rupees in one day. But that is rare. Moreover, there are many people losing a lot of money due to their impatience. Most retail investors do not have the skills to invest at the right time or sell at the right time. (even if something like this exists) It is important to be patient to make money. Check – Effect of Holding Period on Returns & Risk
Will Equity Ever Rule
As you can see, there are many factors that contribute to low retail investor participation in stock markets. But investing in stocks either directly or through mutual funds does give good returns in the long run, if done correctly. (don’t show me recent underperformance this is not much relevant in any investors life as his horizon is 10, 20, 30 even 50 years + bear markets are long term investors real friend)
There are many steps being taken to make investing in stocks and related instruments more attractive –
- AMFI introduced the ‘Mutual Fund Sahi Hai’ campaign to make investors aware of the advantages of investing in MFs.
- MF Industry players are working towards reaching out to investors beyond the top 30 cities through marketing efforts and investor awareness programs. Investors can take advantage of the SIP and STP plans so that they need not deal with large amounts of money. This has resulted in the increase of investors in Mutual funds. Last year’s total collections from SIP were Rs 1 Lakh crore – which is phenomenal.
- The higher education level of people now have access to information and the easy availability of multiple investment tools have contributed to more investments in MFs.
- SEBI has an investor protection program and regularly conducts investor awareness programs on investing, derivatives, stock markets, etc.
- Technology has made it easy for investors to buy and sell. Demat accounts have ensured less paperwork and transparency and immediacy of transactions.
- NPS has forced (or motivated) many investors to participate in Indian equities.
So there are more people who invest in MFs and the stock market. As per a report in Economic Times, the MF industry added around 9,35,000 SIP accounts each month during the financial year 2019-20 which is a good sign as some chunk of this would be invested in equity-based Mutual Funds.
As per the NSE, the number of individual investors registering with it has been increasing at a 10-year CAGR of 11% which is a sign that more people understand the importance of investing in the stock market. But the number of participants in the derivatives market is low. (that is actually good)
There is an increasing trend in the number of investors in MFs and stock markets which means Indians are bullish on the economy and can participate in the country’s economic growth to reap benefits. It will take time for equity to rule as an investment instrument as there are many factors such as knowledge, information, transparency, and regulations that need to improve.
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Please share your views – why investors still have a hitch to invest in equity or Mutual Funds. When do you think equity investing will rule India?