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Retail investors turn away from equity investments as various factors are affecting returns and instruments like bonds and debentures have become more attractive
YOU can double your profit the day the stock is listed sir. This was in 2008 when the IPO of the power company belonging to a major business house was the talk of the town. He invested Rs 45,000 to pick up 100 stocks of the company at Rs 450 per share.
But, with stocks trading in the range of Rs 70-120, there is barely any chance for him to even recover his investments, forget doubling it. Not willing to sell at huge losses and not making money either, these days he does not even log into his demat account.
That has been the state of mind of many retail equity investors in India. All those who invested in the hope of reaping huge returns during the bull run of 2005-08, are now sitting on mounting losses or have exited the markets entirely.
The increasing influence of various global factors in the performance of Indian stock markets and the emergence of other attractive instruments like bonds and debentures has resulted in distrust of the retail investor in equity investments.
Many retail demats are dormant: The number of retail demat accounts have largely remained stable over the past few years. Many retail demat accounts are inactive, and there is hardly any trading happening in those accounts.
There were times during the bull run, when stock broking and securities services firms clocked net profits of over Rs 100 crore. These days, there is hardly any money to be made in brokerages and commissions, experts say, and broking firms are also diversifying.
Companies like India Infoline, India Bulls and Religare, which started off as broking firms, get a majority of their revenues from diverse business like mortgage, real estate, power and gold loans.
An IPO route is usually the most preferred route for new investors to enter the equity markets. There were times between 2005 and 2007 when the entire retail portion of 35 per cent in an IPO would be fully subscribed. Now the retail portions of most of the IPOs go unsubscribed.
Bank deposits, bonds, debentures become attractive: In India, bond markets usually perform well only when the equity market is
low and interest rates are high. With stock market performance being highly volatile and uncertain, this year turned out to be a particularly good year for tax free bonds, tax-saving bonds and retail non-convertible debentures. The high interest rate scenario also urged many new companies to raise public funds offering attractive interest rates.
According to National Securities Depository (NSDL), the value of investments in bond and debt instruments as on March 24, has been Rs 102, 20,453 million, against Rs 53,342,168 in the equity markets, showing the clear shift in favour of debt instruments.
Will RGESS bring back retail investors to equity markets? One of the most talked about announcements in the recent Union budget has been the Rajiv Gandhi Equity Savings Scheme (RGESS), which promises a 15 per cent tax deduction for an investment of up to Rs 50,000 by a new investor in the equity markets.
The move that was intended to encourage retail investors to enter the equity markets has received thumbs down from broking firms as well as mutual fund managers.
Though the intentions behind launching the scheme is laudable, the scheme has a major lacuna.
A first-time retail investor should ideally follow the mutual funds route to invest in the equity market rather than invest in shares directly. Mutual funds offer a diverse basket of investments and are managed by experts.
How can one expect a first time retail investor to choose wisely three to four stocks from among the 7,000 odd stocks listed in the market today.
Apart from the ambiguity surrounding the definition of the 'new investor' to whom the tax deduction would apply, financial experts also question the rationale behind offering tax breaks for equity investments.
People invest in equity only for high returns and not for tax benefits. What is the point in getting a tax-deduction if your investment has shrunk.
There are retail investors who have seen various ups and downs in the equity market, believe in the markets and are hanging around. And there are those who believe it is a good time to make some good buys as the time is ripe and valuations are cheap. There are also moments like the Coal India IPO, which resulted in a sudden spurt of retail demat accounts being opened to subscribe to the IPO. But, will the common investor come back to the equity markets in a big way like he did in 2005-07? Most experts doubt.
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