|No takers for equity|
|Wednesday, 23 November 2011 00:00|
With the Sensex falling 22% over the year, the fact that retail investors are preferring fixed-return securities seems pretty much par for the course. FE reported Monday that, as compared to 11% in 1993, just 4% of total household assets were invested in equity in 2011. But the fall in investor confidence, it has to be kept in mind, is part of a longer trend, though ironic since the share of household assets held in financial form has been going up steadily—even between 2004-05 and 2009-10, it rose from 43% to 50%. Within the financial sector, in 2010-11, 44% of incremental assets were parked in fixed-return bank deposits and 24% in insurance funds—shares and debentures saw their share fall by 0.4% of the incremental change even though the Sensex rose 9.8%.
There are various reasons why retail investors are not increasing their presence in the market, despite the huge growth in GDP and market cap—this also applies to mutual funds since, typically, retail investors come in through mutual funds. One, there is still the feeling that the market is rigged—the fact that the Sebi chief UK Sinha said even big firms indulged in insider trades only strengthens that perception. The fact that 90% of trading is in the futures market also makes retail investors wary, again something Sinha said is a source of concern. The other big issue is of the high fixed-returns that government schemes offer and the incentives given to distributors. As long as the PPF/EPF offer 8-9% risk-free returns, the stock market has to offer much more, given its inherently riskier nature—that puts a natural ceiling to retail investor interest. Given the way the incentive structure is designed, it makes most sense to sell insurance products; cutting distributor commissions for mutual funds hit the industry badly and has made distributors even more reluctant to sell them to investors. The worst-affected is the New Pension Scheme where distributor
margins are next to negligible. Unless these systemic issues are
addressed, there’s little chance of the retail investor returning to the markets even when things start looking better there.