Are we seeing growth in demat accounts at the cost of Rs. sip And the participation of mutual funds or are they growing side by side?
We have historically lived in a period of low interest rates. Low interest rate regime coupled with low inflation is leading to financialization of savings. Indians used to invest their money in immovable property and physical assets like gold. The long-term trend used to be that when inflation and interest rates were high, people shifted to physical assets and when there was low inflation, low interest rates and financialization of savings, there was a shift from physical assets to financial assets. This is the first step that is happening. The attractiveness of buying a house and gold is waning.
The second thing is consumer surplus. There are two types of surplus – financial surplus because during the pandemic, there was no reduction in income for middle and high income earners; Only marginal workers, migrants were affected. For those with middle and high incomes, there were salaries, wage increases were paid and incomes were relatively stable. But the lockdown and the pandemic reduced their spending dramatically. So consumer surplus went to number one in terms of money.
Then there was a time surplus as they were all working from home and working through internet. So, there was a lot of time in hand and in this Google powered era, they have a lot of knowledge about all the asset classes and markets. So time surplus plus financial surplus combined which means they had to invest in financial assets. there is one tina factor When it comes to financial assets.
Bank deposits were the traditional buzzword of Indian investment in the financial sector as it guaranteed returns. Today the fixed deposit rates are 5.5% and for a person paying 20% income tax, 5.5% minus 1.1% becomes 4.4%. So there is no option (TINA) when you have to go for financial savings and options give 4.4% return whereas equity market single digit gives 8% return.
So, we are talking about about 75% more earnings from the equity market. It doesn’t take a lot of brains to understand this math and for young, smart investors, information is available at their fingertips. Hence new folios for demat accounts and even mutual funds have increased; SIP book has grown and mutual fund NFOs are collecting five figures which was never there in the previous boom
Putting all these factors together means that there has been a fundamental shift in the thought process of the Indian middle class on equity. The final icing on the cake is their trust with the Modi regime. Modi’s first 5 years went into preparation. During the second term, the Covid pandemic hit, and then we saw the markets rise to the belief that this government meant business. The average investor has an unwavering belief in the growth power of the Indian economy. All these factors have come into play emotionally and that is why we are seeing this phenomenal growth in mutual fund SIP books.
A new class of investors is emerging who are not looking at the market with the kind of fear shown by typical middle class households while investing their money in the market. These are the people who are very comfortable with trading their phones whether it is in equities or crypto currency. New investors may be small in number now but as they grow, they will also define how the market moves.
Definitely. The retail investor is an emotional creature swinging between fear and greed and on a continuous correction of a week-10 days, they can panic. I used to say Share Market That when your shoeshine boy is talking about stocks, it’s time to sell because in Harshad Mehta’s days people used to invest based on rumours.
Today’s investor is full of information, he is highly educated and I expect him to be much more mature than the old retail investor of 2006-2007, who was a typical middle class employee who spurred rumours and tips to buy equity shares. invested in the markets. We have a lot of highly developed young middle class millennials who I think will look at risk and invest. But in the end, there is an emotional decision. As long as there is a good picture of the future, there is confidence. Modi has assured us that India can move forward and flourish. There is a confident Indian in the new India. There is a new attack today.
It is true that the market is always eyeing the future and will buy on rumors and sell on facts. Till a year or two from now, India’s future outlook will remain bright, people will keep buying. So it doesn’t matter if the reality doesn’t live up to the expectations
As a country, thanks to our demographic dividend, family planning did not work until 2015 as India’s working population continued to grow, while China’s working population began to decline since 2017. So $2000 per capita income is also a cusp. When countries like Singapore, Korea, Taiwan crossed $2000 per capita income, they increased to $10,000 in a decade. We as a country are at such a critical point. India’s long-term blue sky picture of a decade of high single-digit growth is fueling this optimism.