Are retail investors playing it safe?

The increased volatility in stock markets at times scares retail investors. Three experts examine the entire gamut of issues related to fluctuations and risks in the Indian bourses.

S Muhnot

MD & CEO, IDBI Capital Market Services Limited

The recent crash was mainly due to the leveraged position by traders in Futures & Options segment. Retail investors generally dont participate in leveraged positions. An average contract size of over Rs 5 lakh has kept the pure retail investor away from the derivatives segment.

Retail investors should not get pulled away from the market because of the recent crash (or correction). In fact, it is a good opportunity to buy fundamentally sound stocks at lower levels. As we all know, the value of a stock is primarily related to the growth of its earnings. Given that the Indian growth story is intact, implying a significant growth for the industrial sector and more so for the corporate sector. All this translates to higher earning growth and hence substantial increase in share prices over time is inevitable.

Equity investments are a good hedge against inflation and can be easily liquidated in case of need. Currently, the inflation rate is ranging around 5% and the average deposit rate is also around the same level leaving no space for inflation-adjusted returns.

A sensible and systematic investment approach by the retail investor to the equity market will give an annualised compounded return of around 18%-20% as evident from the past history of the markets. A base index of 100 in April 1979 has reached a peak of 12,671 in 2006, in a span of 27 years. Despite the current shake-out in the market, the return is maintained at these levels.

The corporatisation of the stock exchanges, dematerialisation of securities, computerised trading systems, rolling settlement of trades, efficient and time-bound arbitration system, etc has reduced the operational risks to a great extent, and contributed to safety for the investors. Further, these SEs are closely monitored and regulated by Sebi, which gives added security to the retail investors.

The process of direct investing has been further simplified by offering of linked 3-in-1 account (SB a/c, Depository or DP a/c and Trading a/c). The linked account offers 24×7 investing, security, no paper work, easy transfer of funds, instant order confirmations, speed and transparency.

The service provider of 3-in-1 account offers information and market updates, detailed company analysis, technical analysis, and so on to retail investors free of costs.

The retail investors can also apply for initial public offers (IPOs) online for building their portfolios in the equity markets. Therefore, the retail investors can now afford to invest directly in the markets as the risks have been addressed on all fronts and the system is improving day by day due to competition among the service providers to attract the retail customers.

We believe that increased volatility is not because of the FII stranglehold over the market. FIIs are undoubtedly dominant players in the market and are capable of moving the markets in either direction.

Also, hedge funds, which invest with a short-term view in the market, resort to both panic buying and panic selling and their aggressive approach sometimes create unwarranted swings in the market. However, the combined strength of domestic institutions, banks, domestic mutual funds and private mutual funds provides a healthy competition to these FIIs and do not allow them to dictate terms in the market.

The entry of pension funds, provident funds and similar such investing bodies, which have a long-term view, will further check the dominance of these FIIs. And in the times to come they would be the largest players in the market.

The increased volatility in the market was largely due to a large shift in the outstanding position in the F&O segment, from the FIIs/institutions to traders who could not withstand the fall due to limited resource availability. This appears to be a purely temporary phenomenon.