How demonetization lured in the retail investor

The stock market rally, which saw Sensex and Nifty scale fresh lifetime high on Monday, doesn't seem to be slowing down, thanks to retail investors.

Retail investor accounts – folios in equity, equity-linked saving schemes (ELSS) and balanced categories – grew over 77 lakh year on year to more than 4.7 crore.

Demonetization which has driven down interest rates and increased liquidity is also a trigger for retail investment which finds its traditional avenues of debt giving insufficient returns.

“Today's interest rates, as per the householders' frame of reference for inflation, are not giving real returns. Therefore, they have become willing to take exposure to markets,” said Anuradha Rao, MD & CEO, SBI Mutual Fund.

People earlier preferred fixed deposits as they gave reasonably good returns and could be liquidated easily. There were NSCs with post offices but they had a lock-in period and taking loans against them was cumbersome.

“Today, people don't have real returns and if you look at the next two-three years, nothing is going to change that situation as there is a lot of liquidity and no demand from the corporate sector. Only after the NPA situation is resolved will the corporate demand pick up,” said Rao.

On the other hand, gold is popular not as an investment option but as a store of value and real estate cannot be liquidated easily.

Interestingly, a major chunk of the inflows is being driven by retail investors from smaller cities.

According to Crisil data, non-metros have outpaced the top 15 cities when it comes to SIP investments.

"Driven by the surge in SIP inflows, beyond the top 15 (B-15) cities or non-metros have seen faster growth in assets for the mutual fund industry, growing at a CAGR of 30% in the past three years to March 2017, compared to T15 cities' 27% growth," the Crisil report said.

Rao said the SBI Mutual Fund has seen inflows of over Rs 500 crore a month for the last three months, with 50% inflows now being channelled through SIPs.

Arun Kejriwal, founder, Kejriwal Research & Investment Services, agrees that demonetization has led to a surge in SIPs.

“Demonetization suddenly froze the money for a period of a week. People did not have money in their hands, which made them realise they need to move into an asset class which can give them a return which is equal to at least the cost of inflation.”

Though, he believes, that these investors may not be completely uninitiated.

“After demonetization, the inflows through SIP into mutual funds are at record high. Those putting money are not necessarily brand-new investors. These are people having a touch with the equity market directly or indirectly through family or friends. That was the first lot of people who moved into equities. The second lot is somebody who knows well-off people connected with the capital market. A feeling of being left out creeps in,” he said.

Harsh Roongta, a CA and Sebi-registered investment advisor, said that the surge is a combination of many factors. “The investor awareness programmes and the compulsory spending on them was an excellent move. It also helped that the markets have done extremely well,” he said.

“Interest rates have generally gone down, thereby making fixed deposits very unattractive. Real estate, gold has been terrible. With a lot of education, media participation, equities have done well, and therefore, the huge uptrend in equities and debt as well. Ultimately, the larger value investors have realised the tax effectiveness of debt mutual funds.”

A survey by Geojit Securities corroborates that retail investors are indeed looking beyond traditional asset classes such as fixed deposits, real estate and gold.

The findings reveal that retail investors prefer equities over other asset classes, with 83.45% investing directly in equities. Next to equities, mutual funds is the most preferred asset class with 57.21% parking some money in them. The least popular is derivatives, with only 4.76% dabbling in it.

On the way forward, Roongta said a bigger story will unfold over the next couple of years as the real estate financialisation happens.

“For all the talks on real estate investment trusts, etc, it is not very popular. It is still a very much commercial real estate story. I think we will see more funds coming up in the residential real estate. What is the big issue with the residential real estate is that people are taking risks that they have no way of evaluating or controlling. Same thing, in a mutual fund, when you give it over to a professional manager, his ability to control, monitor, assess the risk is much better. We are going to see some big real estate funds (domestic) come up. There is a huge amount of foreign interest in real estate already. I think just as domestic money is driving the equity markets, real estate markets, always driven by domestic money, will be driven now in a different fashion,” he said.

Then what happens is a person can take Rs 20-25 lakh real estate exposure rather than putting crores for buying real estate. And that Rs 20-25 lakh will be spread over 15-20 properties, managed professionally.