Indore Stock：Rise of Retail Investors and Domestic Funds： Transforming India's Market

Indian household sector plays an important role in Indian economy, contributing significantly to gross domestic savings of the country. In the past, individuals commonly invested their savings in risk-free options such as bank account deposits, fixed deposits and Public Provident Fund (PPF) due to their perceived safety and stability. Investing is the stock market was viewed to be riskier due to its volatility and complexity, leading to lesser participation as compared with the traditional saving methodsIndore Stock. However, over time, investing in the capital market became convenient and profitable for the investors.

Evolving trends in the capital market

India is one of the fastest growing economies in the world. It is evident from its capital market showing a remarkable upsurge. Market capitalisation on the National Stock Exchange (NSE) has increased from US$ 2 trillion in July 2017 to US$ 3 trillion in span of 46 months and rose further to US$ 4 trillion in thirty months. The capital market set a new benchmark by rising to US$ 5 trillion in just six months from December 2023.

Source: The Financial Express

Distribution of investors in the capital market across different age groups

Recent analysis by Motilal Oswal reveals that investment from various age groups in the capital market has reduced, while there has been a notable increase in participation from the younger generation.

Source: Motilal Oswal presentation

Young investors under 30 have grown significantly, rising from 29% of all investors in FY19 to 48% in FY23. They are willing to diversify their portfolios beyond traditional assets by investing in the stock market and mutual funds. This participation has not only expanded the investor base but has provided a strong foundation for the market to flourish further.

Growth in retail investors and domestic funds in India

Source: The Financial Express

*Until January 2024

The above chart shows a notable change in investments, with increased participation from domestic institutional investors (DII) and foreign institutional investors (FII). DII investments rose from US$ 8.64 billion in FY19 to US$ 15.35 billion in FY24 (until January), while FII investments reached US$ 20.48 billion in the same period.

Source: The Financial Express

Retail participation has been a key support system driving positive trends in the stock market. From just 4 crore demat accounts in 2020 to 14 crore demat accounts in 2024, over 10 crore new investors joined the capital market during this tenure.

Mutual funds - Rise in domestic funds

Mutual funds in India are gaining popularity as investors look to diversify their portfolios and take benefit from the expertise of professional fund managers.

Source: The Financial Express

*Until January 2024

Mutual funds’ performance depends on investor flows and market movements. The net inflow received by mutual funds is US$ 61.09 billion (Rs. 5.1 lakh crore) in FY24 (till February). Assets managed by domestic mutual funds (MFs) grew by 34% in FY24, the highest increase since 2016-17, driven by a strong equity market rally and substantial inflows. The YoY increase in the share of local funds was the highest among all categories of institutional investors in FY24.

Factors driving the growth

SEBI regulates the functioning of stock exchanges

Regulatory reforms by Security and Exchange Board of India (SEBI) have provided confidence to the market participants, leading to a surge in investors driving the market dynamics and contributing to increased liquidity.

SEBI ensures maintaining fairness, transparency and efficiency in trading operations. This includes preventing fraudulent and unfair trade practices.

It oversees various market intermediaries, such as brokers, investment advisers and mutual funds, to ensure they adhere to the regulator’s norms, and strict actions are taken against the one who violates the regulations.

SEBI promotes investor education and awareness by various initiatives, such as publishing educational materials, organising workshops and seminars, launching awareness programmes and providing investor grievance redressal.

SEBI helps in prevention of insider trading, with the following regulations:

Prohibition of insider trading regulations, 2015

Code of conduct for prevention of insider trading

Trading window closure

Mandatory disclosures

These assuring factors of SEBI boost investor confidence by promoting transparency and ethical investment practices, leading to increased investor participation.

Fintech driving higher adoption

User-friendly trading applications have emerged in recent years as people’s comfort levels with technology increased. These applications enable people to trade in capital markets directly from their mobile devices. A substantial proportion of retail investors includes the age group of 22 to 35 years old, who aim to optimise their investment yieldsUdabur Stock. These tech-savvy individuals have quickly embraced the shift to mobile apps and payment platforms that give them direct access to capital markets. They have witnessed the potential for earnings beyond traditional options. Consequently, they can now explore and capitalize on opportunities in the stock market. As of September 2023, Groww had 6.63 million active investors, indicating a growing investor base in brokerage firms.

Eased KYC process

KYC process has now become simpler for investors as it includes Aadhaar verification, simplifying the identity verificationNagpur Investment. Using Aadhaar, investors can quickly complete KYC requirements online, reducing paperwork and processing time. The process is streamlined, which makes account opening faster and more convenient, encouraging more people to invest.

Financial inclusion programmes

In India, financial inclusion has received a lot of attention lately, which resulted in people's increased comfort with technology as they shifted to using digital payments such as UPI. Additionally, many brokers and the government have offered numerous training sessions and short-term courses that advance the knowledge of the investors to invest in the capital market.

Tax benefits

Investors looking to lower their tax liability may find certain mutual fund schemes, such as Equity Linked Savings Schemes (ELSS), attractive since they provide tax deductions under Section 80C of the Income Tax Act.

Increase in risk appetite

Increase in country’s GDP leads to rise in disposable income, that has consequent effect on the risk appetite of individuals. With the rise in disposable income, people try to diversify their portfolios, in stocks, bonds and other securities, seeking higher returns on their surplus funds, driving up demand and market activity.

Conquering the major challenges

Technological barriers

Technology played a significant role in increase of participants in the capital market. Investors now have easier access to investing because of a wide range of user-friendly trading platforms. Users can now transact with ease and in much less time owing to the shift from traditional paper IPO forms to digital ones and from physical share certificates to demat. With just one click, all the information can be accessed, making trading with a mobile device effortless.

Limited market participation from smaller towns and rural areas

Due to low financial literacy and fewer opportunities for investment, there has historically been a low participation rate from the rural population of India. This challenge is addressed by conducting outreach programmes, financial literacy campaigns, developing localised financial services and support systems that cater to the unique needs of investors in different regions, which ultimately benefits in more investor participation in the capital market.

Trust and transparency issues

Trust is a major factor in the capital market. SEBI mandates companies to disclose all necessary information that helps investors to take informed decisions. Also, financial institutions can build investor confidence by adopting transparent practices, which involve clearly disclosing information about fees, risks and performance. Additionally, clearly communicating the risks associated with different investment products can aid investors to make informed decisions based on their risk tolerance. For example, fintech platforms such as Zerodha in India have gained popularity by offering transparent fee structures and comprehensive educational resources that help explain complex financial concepts to retail investors.

Conclusion

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