Equity cult is a non-starter: Why we are still a country where only a small percentage of the population invests in equity Their allocation to equity is, thus, small and marginal, tentative and short term. For a country that has so many entrepreneurial successes, the distribution of wealth and participation of public through equity markets is not large, deep and wide enough
Uma Shashikant
Chairperson, Centre for Investment Education and Learning
Some conversations have not changed over the years. One would have expected the equity cult to spread widely after the euphoria of the first set of financial reforms in 1984, memories of money made in the Reliance public offer, and the market boom of 1985 that spawned financial journalism and company analysis for public consumption. Forty years later, we are still a country with a small percentage of the population investing in equity.
#sr_widget.onDemand p, #stock_pro.onDemand p{font-size: 14px;line-height: 1.28;} .onDemand .live_stock{left:17px;padding:1px 3px 1px 5px;font-size:12px;font-weight:600;line-height:18px;top:9px} #sr_widget.onDemand .sr_desc{margin:0 auto 0;} #sr_widget.onDemand .sr_desc{color: #024d99;margin-top:10px;} #sr_widget.onDemand .crypto .live_stock .lb-icon{8px 6px 5px 3px !important} #sr_widget.crypto.onDemand a.text{border-bottom:1px solid #ccc;padding-bottom:5px;display:block;width:100%} #sr_widget.onDemand .sr_desc .text p, #stock_pro.onDemand .sr_desc .text p{font-size:12px;font-weight:400;} Investors in equity still focus on IPOs and trading. They like the idea of making money quickly and see equity as some skill-based gamble that pays off. A small group intensively pursues equity analysis and invests in stocks with long-term conviction. Mutual funds, portfolio management services (PMS) and alternative investment funds (AIF) are part of many household portfolios, but that growth has been gradual, taking its time to entrench itself. The majority that lies outside these pursuits still remains sceptical, unwilling and somewhat scared.
When I tell them that equity investing is like participating in the success stories you see around you in every day life (Peter Lynch made that persuasive case so many years ago), they are unable to grasp it as an implementable idea. Do your children go to government schools? Who is is your mobile service provider? Which bank do you have an account with? Where do your grown-up children work? Who delivers your grocery and food? I ask these questions to simple investors who care to listen. They understand that the economy is now driven by private players, not the government.
However, they don’t trust private players. Do you see small entrepreneurs around you, I ask. These are the women offering catering services from home, or small businesses right around the corner from where they live, that have grown bigger over the years. They admire these endeavours, but that is not the dominant emotion. They think that there must be something dishonest and deceitful about running a business. The lack of integrity in our system is a curse. Despite evidence that stares them in the face, people don’t feel inspired to participate in success stories they see around them.
The suspicion that equity investing is not a very reliable path to long-term wealth creation is, sadly, still the view many households hold. Their allocation to equity is, thus, small and marginal, tentative and short term. For a country that has so many entrepreneurial successes, the distribution of wealth and participation of public through equity markets is not large, deep and wide enough.
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The two ends of the process that make scale possible are weak. The government and its institutions have taken too long to recognise the power of equity investing for long-term wealth. Our provident funds and pension systems have taken too long to see index funds and ETFs as a simple route to introducing equity to long-term retirement portfolios. The refrain that retirement funds cannot be risked in equity investing is still widely held. The government, for its part, meddles with rates in capital gains and investment incomes every year, which make for poor messaging of real benefits.
The other end of the process that takes care of the last-mile connectivity for the investor is also broken. For millions of insurance agents who tap the retail market for selling policies, the number of mutual fund advisers and distributors taking equity investing to the retail market are too small in number. Electronic platforms are intimidating with their choices and jargon, said some of the investors I spoke to. “To navigate to the choice I need and click on the right fund feels complex as there are too many questions in my mind,” said one. “Why not engage an adviser?” I asked. Scarred by teaming bank relationship managers who push products, they do not think they can get unbiased advice. For a country of our size, the last-mile connectivity for longterm equity investing is still broken.
Getting a simple household to see that holding a diversified portfolio of equity shares is a good way to build long-term wealth should not be so difficult. Or is it? How does it work elsewhere? I recall how the penetration of mutual funds in household portfolios in the US would be a cause for envy in the early years for our industry. That happens by default. Everyone has a 401k account for retirement savings. This saving is invested in equity mutual funds to enable long-term wealth creation.
So, does a US household believe immensely in the power of equity and direct its savings to equity markets? In a country with so many successful entrepreneurs, is that a given? Yes, but households mostly have their brokerage accounts and invest in direct equity. They have their investment clubs, groups and discussion forums. The conviction in equity translates into buying, selling, trading and investing in stocks directly. Yes, a large number of them also trade in equity and derivatives for a quick gain. Mutual funds suffer a tax disadvantage—capital gains and income are recognised separately and taxed accordingly.
The case is not too different in successful Asian countries like South Korea. Investors prefer to trade and buy stocks on their own, and make their gains and losses through their own trading calls. Why don’t investors trust others to manage their money? I wonder if the refusal to cede control is coming in the way of longterm wealth creation.
In India, we have a mutual fund industry that builds long-term equity portfolios at low cost and offers it to the public as an easy way to participate. The educational messages are uniformly beneficial. Invest in a diversified portfolio, not in stocks. Hold for the long term. Let the fund manager undertake selection and timing. Align portfolios to your needs. Invest in equity for long-term growth. In a slow, steady and gradual process, equity investing among households grows. A larger majority is still sceptical and on the edge.
The Author IS CHAIRPERSON, CENTRE FOR INVESTMENT EDUCATION AND LEARNING
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This story originally appeared on: India Times - Author:Faqs of Insurances
