RETAIN ROULETTE

Inexperienced investors spin the market wheel, chasing dizzying valuations and risking a bubble burst

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The past five years have witnessed a seismic shift in the investment landscape in India, marked by an unprecedented surge in retail investors. This rise is particularly pronounced among young investors who lack financial literacy and education. To put it in perspective, the number of active demat accounts grew from 3 crore in 2017 to over 16 crores by June ’24. Today, retail investors account for approximately 50% of the total trading volume on exchanges. While the growth of retail investors is commendable, it also poses huge risks for the market and investors in general.

THE RUSH HOUR

Demonetization, announced by the Indian government in November ’16, involved the withdrawal of high-denomination currency notes (₹500 and ₹1,000) from circulation. While its immediate impact was cash crunch, it also led to a shift towards alternative investment avenues, including the stock market.

This trend was further fuelled by the Covid-19 pandemic. Lockdowns and the work-from-home culture provided individuals with more time to explore investment opportunities. As a result, the number of retail investors in India surged from around 11 million before March ’20 to approximately 25 million by early 2023. Many new investors, particularly the young, took the plunge into the stock market.

Furthermore, the digital revolution in India has played a pivotal role in democratizing access to the stock market. The proliferation of user-friendly mobile trading apps has made it easier for individuals to invest directly in stocks and mutual funds. A survey indicated that around 27% of Indian millennials now consider investing in the stock market as a viable option, compared to just 8% five years ago.

Another important factor was the decline in interest rates on traditional savings instruments, which prompted investors to seek higher returns in the stock market, including equities and mutual funds, to grow their wealth.