Participation of retail investors in India's capital markets has grown leaps and bounds in the last few years. The Economic Survey 2023-24 acknowledged that the enhanced participation of retail investors lends stability to the capital market and has enabled them to earn higher returns on their savings. But at the same time, it also raises concerns on growing retail participation in the "speculative" derivatives market and advises caution on rising gambling instincts.
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"The significant increase in retail investors in the stock market calls for careful consideration. This is crucial because the possibility of overconfidence leading to speculation and the expectation of even greater returns, which might not align with the real market conditions, is a serious concern," the economic survey noted.
In the last few years, especially post pandemic, retail participation in capital markets, either via mutual funds or directly buying and selling shares, has gone up considerably. The total demat accounts, for instance, topped 15 crore in March. Mutual Fund folios have doubled in the past five years, according to an ICRA Analytics report earlier this year.
But, at the same time, the number of traders dabbling in the derivatives market has also gone up. In 2023-24, participation in the equity derivatives segment rose 42.8 per cent to 95.7 lakh.
The survey noted that the increased retail participation in financial markets and familiarity with financial products are beginning to grow in line with India’s emergence as the world’s fifth-largest economy. However, it noted that while derivatives were hedging instruments, they were mostly used as speculative instruments by investors worldwide, and India was likely no exception.
"Derivatives trading holds the potential for outsized gains. Thus, it caters to humans' gambling instincts and can augment income if profitable. These considerations are likely driving active retail participation in derivatives trading. However, globally, derivatives trading loses money for the investors, for the most part," the survey pointed.
It feels that raising investor awareness and continuous financial education is essential to warn people of the low or negative expected returns from derivatives trading.
"A significant stock correction could see losses that are more considerable for retail investors participating in capital markets through derivatives. Investors’ behavioural response would be to feel ‘cheated’ by unseen more considerable forces. They may not return to capital markets for a long time. That is a loss to them and the economy," the survey stressed.
Citing the global financial crisis of 2008 and the Asian crisis of 1997-98, the economic survey noted that the financialisation of economies had not ended well, even for advanced economies, and therefore called for an orderly and gradual evolution of the financial market in India.
"All stakeholders – market participants, market infrastructure institutions, regulators, and the Government must ensure that capital markets play their theoretically assigned role of directing savings to their most productive investments. It is not just in the national interest. It is an act of self-interest, too," it said.
Firms operating in banking, insurance, and capital markets must keep the interests of the consumers in mind and improve their service quality through fair selling, disclosure, transparency, reliability, and responsiveness, it added.
