The Economic Survey 2024 reveals that India’s financial markets are witnessing increased retail participation as the country emerges as the world’s fifth-largest economy. This growth in familiarity with financial products indicates a promising trajectory, yet the Economic Survey 2023-24, released on Monday, advises careful attention to certain areas that require focused oversight.
Amid ongoing regulatory scrutiny, the survey emphasizes the significant rise in retail investors in the stock market and urges caution. “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 survey noted.
Alarming Trends in Derivatives Trading
According to a study by the Securities and Exchange Board of India (Sebi), over 90% of retail traders venturing into the futures and options (F&O) markets are incurring losses, a worrying trend highlighted by market expert Ajay Bagga. He pointed out that while retail participation through well-regulated and diversified mutual funds is a positive development, the surge in direct market involvement is concerning.
By December 2023, Indian households owned more of the Indian markets than foreign portfolio investors (FPIs), marking a significant milestone. With increasing household savings flowing into investments and speculation, regulators must decide when to intervene and what measures to implement.
Driving Factors Behind Retail Participation
The active retail participation appears to be driven by derivatives trading. “Derivatives trading holds the potential for outsized gains. Thus, it caters to humans’ gambling instincts and can augment income if profitable,” the survey explained. However, it cautioned that derivatives trading often leads to losses for investors globally.
The capital markets have experienced a surge in retail activity, both through direct trading and indirect trading via mutual funds over the last few years. In FY24, individual investors accounted for almost 36% of the equity cash segment turnover. The number of demat accounts with both depositories increased from 114.5 million in FY23 to 151.4 million in FY24.
Need for Financial Education
To mitigate the risks, raising awareness and providing continuous financial education are essential. Investors must be informed about the potential for low or negative returns from derivatives trading. The survey warned, “A significant stock correction could see losses that are more considerable for retail investors participating in capital markets through derivatives.”
Regulatory Considerations
Ajay Bagga suggested that classifying F&O income as speculative or taxing it at a uniform rate of over 30% instead of the current rate could negatively impact investor sentiment. Moreover, extending the tenure for capital gains on stocks or moving to a marginal tax rate for any holding period, similar to debt funds, could further dampen sentiment.
Nirav Karkera, head of research at Fisdom, highlighted potential measures to create a retail-restrictive environment in the derivatives segment, such as increasing lot sizes, limiting expiry days, and raising margin requirements. He warned that these topics might feature in the Budget speech and could attract retail-restrictive policies. However, he clarified that the aim is to protect retail investor interests rather than outright penalize them through elevated taxation.
In conclusion, while the rise in retail investors in the Indian stock market signifies a positive trend, it also necessitates careful consideration and regulatory oversight to ensure sustainable growth. Continuous financial education and awareness are crucial to safeguarding retail investors from potential risks. Stay informed and prudent in your investment decisions to navigate the evolving financial landscape successfully.
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