For the past two years or so, if any retail investor asked a ‘financial expert’ whether this was the right time to invest in the stock market or not, the answer would invariably have been, ‘Refrain for the time being and enter when there is more certainty’. Investors appear to be taking this advice rather seriously.
We read reports in various media as to how retail investors have jettisoned stocks and fled to safer havens such as gold. This phenomenon is not restricted to India alone. The abiding global sentiment prevailing today is that stocks are ‘risky’ and should therefore be avoided. The grief-inducing headlines in various newspapers are further cementing this belief (the past two weeks notwithstanding). Everyone says that they will invest when times are ‘more certain’.
In India, such apathy has been the cause of great angst for the Regulator, stockbrokers, mutual funds and their distributors and even the media. Financial planners, too, are at their wit’s end as to how to nudge their clients towards increasing their equity allocation. The Government too appears to have woken up from its stupor and has initiated some steps (albeit ham-handed) to encourage the equity cult.
However, apart from what should be done, I will dwell on what has been done.
The regulatory push: Fortunately, Sebi is not beset with the ailment of “Policy Paralysis”. Hence, they have announced a two pronged set of measures recently :
(A) To encourage retail participation in the form of assured allotment of equity shares in Initial Public Offerings (IPOs) and extension of Application of Shares Against Blocked Amount (Asba) and so on.
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(B) To enhance market integrity and confidence by improving the quality of disclosures, quality of issues and also better monitoring.
While these measures are important, they amount to tinkering with the plumbing of the markets and, hence, may not yield benefits in the short-term.
Usually, in any market the perception that markets are risky, emanates primarily from price movements and not outright fraud. Over the past few years, investors have either suffered bouts of heavy losses or earned pre-tax returns which are below that given by fixed income instruments. Once investor interest reaches a higher plane, the virtuous cycle of better quality IPOs etc. will be set in motion. Hence, these measures could at best be viewed as a catalyst for increased participation over the next few years.
Mutual funds are more accessible: As equity markets get more complex, it is preferable to route your investments through mutual funds. However, as they are a microcosm of the state of the markets, they too have been experiencing tepid inflows.
However, I believe that the lack of interest is not due to any shortcoming on the part of mutual funds. The industry had gone into overdrive over the past five years or so, explaining the merits of investing through mutual funds and the futility of timing the markets. This is evident in all forms of media as well as in on-the-ground activities, in the form of events, seminars, etc. These have sought to allay apprehensions and manage expectations of current and prospective investors. The various education and marketing efforts have been well supplemented with investor-friendly transaction mechanisms, be it online or offline. Such efforts have not been entirely fruitless as can be seen from the growth (and stickiness) exhibited by Systematic Investment Plan programs albeit from a small base. I believe that such efforts should continue.
Again, while the regulatory impetus in the form of relaxed documentation for certain categories of investors, etc will aid inflows over the longer term, a rising market will achieve what a thousand ‘reforms’ may not.
The macro environment: While retail investors are not savvy enough to discern and decipher the various nuances of macroeconomic policy, they are well aware of the ground realities. For instance, any perception that inflation is coming off will inspire confidence in the future outlook and encourage them to increase their exposure to stocks. Alternatively, an impending fall in interest rates will spur them to seek other options. In other words, sensible steps on the macro front may have as good an impact on stock market inflows as announcements of marquee reforms.
It ain’t different this time : Finally, we should come to terms with the fact that this is not the first time that this is happening. World over, retail investors always follow market movements rather than lead them. In other words, they are rarely counted among the “Smart Money”. The lull in the markets over the past few years has led to a decline in interest. However, this could quickly reverse once markets move higher. Unfortunately that will also mean that they will miss the first round of the rally (In fact, I believe that this is underway right now). What may also help is the emergence of a few ‘brand ambassadors’ in one’s vicinity who make some money in the markets and then tom-tom it. After all, there is nothing like an endorsement from people whom you trust. Obviously, this does not mean that you too will make the money that they did, but it will spur many more to ‘try their luck’. I believe that the groundwork has been laid out. We always say that ‘investments require patience’. It is high time all constituents ‘walked the talk’ and displayed the same patience with regard to retail investor participation.
Don’t let headlines scare you: Yes, there will be enough headlines saying ‘retail investors lost lakhs of crores’ in a single day or week. However, see these events are opportunities. As Warren Buffet said, ‘Buy in panic, sell in euphoria’. This especially works on day when there is fear all over. So use such days to your advantage. Though there will be several talking heads adding fuel to the fire by dwelling on near-term negatives rather than play the role of soothsayers, it is for you to enter good blue-chips on such times. For one, you will get them cheap and two, blue chips often lead any turnaround rally.
The writer is head - marketing, PPFAS Asset Management. Views expressed are his own