What is Core & Satellite strategy?

Getting newer investors into stock markets is important. But how we deal with them in a downward market movement is what will determine, if we can attract newer individual investors.

Of the 130 crore Indian citizens, only 3.7% invest in equities. In the US over 55% of the population invests in equities (direct or through mutual funds). China has over 12% of its population investing in equities. Equities as an asset class comprised only 4% of Indian household assets, as of December 2020.

The debt markets have been subdued and with lower returns and higher risk perception, investors have been staying away. Fixed deposits have been giving low returns. Realty, as an asset class is worrying the investors; due to project completion worries.

These worries have pushed newer investors to take their punt on stocks!

Who moved my stock?

The Indian stock market has a large presence of individual investors. Especially since the Covid lockdown, a large number of new individual investors have been added to this count. NSE data shows that they have brought nearly 90 lakh new investors to the trading platform during FY2021. While BSE has added 1.78 crore new investors between May 2020 till now.

Data also shows that millennials have come into the market as new investors. The economic slowdown since last year added the sentiment of potential loss of livelihood. This added an incentive or a need for an additional source of income – Stock trading it was!

Data from NSE shows that Individual investors have slowly moved up from a 33% market share (of trading turnover) since 2016, to 45% in 2021. This essentially means that most of the price volatility and intraday moves can be attributed to the individual investors trading.

Most of the first-time investors have also been experimenting with their trades. Not all of them invest with a rational or investment theme in mind. What if many of them are viewing the stock market investment as a thrill or entertainment? Will the beginner’s luck get to them eventually?

Individual investors’ influence?

Institutional investors have the resources and capability for research on the companies/industries they invest in, or track. They also have larger pockets to take an “influential” position on a stock, to affect any business decisions or behaviour. In this aspect, much is desired for an individual investor. As they say, that in a stock crash, it is those individual investors who are generally left holding the can.

If you look at non-promoter holdings (“floating stock”) of the market, individual investors who had an 18% share of it, now have only 9%.

In a nutshell from the above data points, “Holding the stake” seems to be institutional investors’ role while the “trading movement” is by individual investors.

Valuation euphoria or bubble?
Valuations are the present value of anticipated earnings & profits. Stock prices are supposedly based on such rational calculations and not on belligerent sentiments or perceived financial rewards.

During the past many months, we have seen a rise in short-term profits on the back of companies curtailing costs and trimming payroll. The point is once the lockdown eases fully and once the economy steers towards normalcy, are these profits sustainable?

Consumer grievance redressal
We have had a rise in multiple communication and advisory avenues for trading advice and “pushing particular stocks to the front” platforms. Most of these do not take into account the risk profile of the investor or their investment horizon.

In a rising market, consumers are excited as they are booking profits or seeing their investment value increase. What happens if individual investors lose monies on wrong bets or wrong exits? What if the advisory has been wrong?

We need to regulate advisory platforms well and such consumer grievance be addressed quickly to maintain investor confidence in the stock markets.

Stitch it now
To improve the number of new individual investors entering the stock markets, we need to improve consumer trust by ensuring:

-Investment advisories are regulated tightly.

-Punish unlicensed, unregulated, and unsolicited platforms offering advisory; one has to deter such scamsters.

-Punish any media that only glamourises stock investing, without mentioning risk elements. Or if they promote specific stocks.

-Ensure that consumer grievances can be addressed quickly.

-Communication around stock investing be simplified and such a consumer literacy program be run in multiple languages.

-Make it compulsory for any consumer awareness campaign or literacy program to spell out the risk elements in investing and to detail out the consumer grievance mechanism.

(The writer is an independent markets commentator. Views expressed are personal)