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Changing face of Indian Capital Markets!! Right time to switch your Traditional Banking Investments

The capital markets in India have taken a quantum leap from the days when brokers gathered under a banyan tree in Mumbai and a neem tree in the then Calcutta.  In the early 1990s, both BSE and NSE together clocked a daily turnover of Rs 210-260 crore, with presence of retail investors alone. The figure has catapulted 1,200 times to Rs 3.2 lakh crore between the cash and the futures segment in August 2016.  The market breadth too has expanded with more companies raising finance via IPOs, widening the scope for investors. To substantiate with numbers, the total amount raised by non-government companies during the entire decade of seventies was a meager Rs 883 crore or Rs 88.3 crore annually. Fast forward to 2015-16, a whopping Rs 34,322 crore has been raised via the capital markets. In fact, Rs ?5,855 crore was raised during just one quarter (June) of 2016.   Not just have retail investors been directly participating in the market, but they have played a key role in developing domestically driven capital market ecosystem consisting of Mutual Funds, Insurance companies and Pension Funds, which shielded the Indian capital markets when foreign investors were wary of investing in emerging markets during the global meltdown.  As a result of this average Mutual Fund assets have spiraled to Rs 13,80,746.7 crore as on June 2016, which is 425% higher than Rs 2,62,782.12 crore managed by Mutual Funds a decade ago. Insurance behemoth LIC too invested the highest-ever amount of Rs 60,000 crore into equities during the financial year 2015-16.  The rewards in financial investment instruments have lured more investors. As per RBI gross financial savings have swelled from Rs. 9,335.43 billion in 2011-12 to Rs. 12,792.54 billion, while their faith in physical and valuable assets has declined by Rs 1,254.58 billion over the period.  The increasing interest in Indian equity markets is also evident from the 43% rise in the number of demat accounts from 1.71 crore to 2.47 crore. Also the value of securities traded has more than doubled to Rs 133 lakh crore.  Innumerable examples of stocks which have multiplied wealth have led to this astronomical rise in both the value and the interest in Indian capital markets. We have reflected on these multi-baggers in our annual study of Wealth Creators since the past 19 years.  When SEBI questioned investors in a nation-wide survey in 2011 (the next survey is under progress) about the reason for avoiding equity market investments 20-38% of those surveyed cited inadequate information and skills to invest in equity markets as the concern, which ranked much higher than safety and liquidity of investments.  Our piece of suggestion to them is not to restrict investments to let professional asset managers such as Mutual Funds, Portfolio Managers handle the investment pie. The primary reason being that fixed-rate instruments, which are preferred by majority households, would be offering much lower returns owing to the interest-rate downward spiral. Additionally, inflation, as well as taxes eat into the 7-8% that one earns as interest.  For those wondering about companies vanishing away with their money, can seek respite in the vigorous and active regulatory environment in India. Several measures have been taken to ensure protection of retail investor. The steps taken in an event of mishap have reposed the faith of investors in equity markets.  If that weren’t the case, then today individual investors (excluding corporates and institutions) wouldn’t be accounting for 85% of the total equity assets of Rs 4,28,212.16 crore managed by mutual funds. The individuals who have been resorting to invest into markets through the mutual fund route have just been growing leaps and bounds. Between the 7-year period of 2009 and 2016 13.26 lakh folios were added to the mutual fund basket.  Not just individual investors, but legacy investment managers at the Employee’s Provident Fund organization too have realized the might of equity and have increased the percentage of investments that would be diverted to equity from 5% to 10% recently.  Since, there is a longer-term lock-in on the EPF investments until the retirement age, I am sure the equity edge of provident funds would offer tremendous advantage to a bulk of India’s population in the organized sector as equity investments – though volatile in the short-run – tend to flourish during the longer haul.  Investors who have burnt their fingers in the past, tend to get out of the loss-making stocks as soon as they see their principle amount back on the cards, only to repent later. If they resist the temptation of selling too quickly they would be able to realize multi-fold returns. Our philosophy at Motilal Oswal Securities has been to buy into the right stocks and sit on them for a long duration – a least of five to ten years.  Take for instance our pick of HDFC Bank way back in the 1998-2000, when it traded at Rs 31-37. The leading bank stock clocked a high of Rs 1,258 on the charts this month, which is an eye-popping return of 4000% over a period of 16 years. If you bought 1000 shares at Rs 31,000 in 2000, that money would have grown to 12.58 lakh today.  Your FD during a similar period would have grown to Rs 1.23 lakh considering an interest of even 9%, which no one has been able to garner since the past one year, except senior citizens on co-operative bank FDs. Reduce them in tune with taxes and you have a much lower yield of 7.89% for the 30% tax bracket.  If the average inflation during the period is 7% then you would hardly be able to match the inflation with fixed-rate instruments, leading to losses even though you have been saving money. Compare this with the tax-free 13-16% returns that diversified equity mutual funds have generated over the past 10-years.  In stocks and equity mutual funds, you not just beat inflation but bear no taxes at all if you hold on to your horses for more than a year. Retail investors in mutual fund too have been realizing, the benefits of holding on for the long run. This is evident from the time period they are holding their equity mutual fund investments. More than half of the retail investors held onto an equity scheme for more than 2 years and this number has been improving with each passing year.  But instead of lamenting about missing the past stock-market surges, it is time to act now to ensure you don’t lose out on the next leg of rally in the Indian stock markets as from the macro-economy standpoint, India is best poised to knock the highest growth rate among global peers.  And investing into equity isn’t as difficult as it used to be in the yesteryears. The Swedish model of a for-profit exchange adopted by NSE, replaced the prevalent broker model and helped Indian stock markets mark a global footprint in terms of transparency, settlement cycles, liquidity and robustness. Today Indian bourses are being termed as the most modern exchange in the world, which has undergone transformation faster than any other global bourse.  About Mr. Ajay Menon  Mr. Ajay Menon is the MD & CEO of Broking & Distribution Business of Motilal Oswal Securities Limited (MOSL). He has over 18 years of capital market experience. He joined the Group in 1998 and was responsible for Operations, Compliance, Legal, Risk Management, Business Process Excellence and Information Technology.  He has been the cornerstone of MOSL’s strong performance track record. He has been the driving force behind the operational excellence at the Group which has enabled the businesses deliver highest customer delight. He has also been instrumental in various change initiatives including driving a culture of systems and processes across all group businesses. He has also engineered development of several state of the art technology initiatives to provide businesses a cutting edge and also a unique value proposition within the businesses they operate. A strong focus on compliance and risk management has helped the group deliver superior business results even during volatile market conditions.  Mr. Menon is also a member of the Institute of Chartered Accountants of India. He has also cleared the Series 7, 24 and 63 of FINRA Regulations. 


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