How Does Total Capital Investment Influence Economic Growth?
To become a developed economy, India needs to have strong financial markets. But as far as the financial habits of the populace are concerned, we are nowhere close to this.
As Indian investors, we have this strange love-hate relationship with the stock market. We love it when it constantly clocks upward trends – and hate it when it goes downhill.
But why are we even talking about this today? To become a developed economy, India needs to have strong financial markets. But as far as financial habits of the populace are concerned, we are nowhere close to this.
The following numbers speak for themselves...
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A majority of Indians avoid investing their money in equity markets. In fact, out of a population of 1.3 billion, there are only 18 million investors in the equity market. It’s a similar story for the mutual fund market in India – with only 2 crore investors (less than 1.5% of the population).
So, why don’t more Indians invest in the equity market? Here are the top 5 reasons.
1. Lack of trust
The Indian stock market has had its share of past financial scams such as those involving Harshad Mehta and Ketan Parekh – that resulted in many stock market investors losing their money. Some of the recent scams include the Nirav Modi scam and the Satyam Computers scam.
Though, with the establishment of the Securities Exchange Board of India (or SEBI), stock market trading is much more regularized – without any major market mayhems.
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Hence, due to the general lack of guarantees or securities along with the probability of getting duped of their hard-earned money, most common Indians stay away from the stock market.
2. Lack of knowledge
Most Indian investors lack a basic knowledge about the way stocks markets function. Despite extensive information on fundamentally strong stocks and companies, investors are reluctant to invest their hard-earned money into these companies.
Other investors believe that the stock market is an avenue for turning “quick profits.” As a result, they lack the necessary patience and end up buying – or even selling – stocks in quick time.
The reality is that the stock prices of even good companies take time (even years) to grow and stabilize – to provide good returns to its shareholders.
3. Availability of other financial instruments
Simply ask your friends or family members about where they usually invest their money. Most would answer – gold, fixed deposits & bonds, or even real estate. That is the reality – other financial assets (including gold) account for 30% of investments in India – while being just 10% around the world.
Comparatively, equities account for just 12.9% of investments in India – compared to 26.1% in the rest of the world.
Image source: Economic Times
This is primarily because most Indians prefer to invest into “safer” instruments that provide low to modest returns – as compared to stock markets that are deemed as “risky” and considered suitable only for wealthy investors. This brings us to our next reason – that is the lack of capital.
4. Lack of capital
Take a look at the “top guns” or success stories of the stock market – the likes of your Rakesh Jhunjhunwalas or Rakesh Kedias. This has created a perception that you need to invest loads of capital or money into stocks – in order to earn healthy returns. But that is far from the truth – many successful investors have started small during their early days, working slowly and steadily towards sustainable profits.
For example, a systematic investment plan (SIP) in mutual funds can be started with a monthly investment of just 1000/- (as shown in the figure).
Similarly, if you want to trade in stocks directly, you can invest a small amount consistently in purchasing stocks of the right companies. Despite these facilities, lack of capital is often cited as a leading reason why most Indians do not invest in the equity market.
5. No appetite for risk
When it is a matter of investing their money, most Indians do not have the appetite to take risks. That is the reason why Indians invest in financial instruments like fixed deposits and gold – that are regarded safer in the long run.
Despite their higher returns, equity investments – along with mutual funds – do have an inherent element of risk that keeps most investors away. An additional risk factor is that common and small-time investors need to depend on the financial advice of “friends” or “experts” – as most don’t have the time to track or understand the equity market themselves.
Indian investors often cite a lack of understanding, financial risk, or other reasons for not investing their money in the stock market. Other short-term investors enter stock trading to earn a “quick buck” – and also exit the market forever after a bad experience. We have looked at five top reasons why there are so fewer active investors in the Indian equity market.