Your behavioural traits often influence our money habits. You are currently witnessing a sense of euphoria around you. A lot of people have invested in recent initial public offerings, or IPOs, and made money. They have bought shares last year and made money. There is a good chance that you have made some money too.
All of that is leading to you looking at investing more seriously than ever before. This column has often touched upon behavioural issues like herd mentality and fear of missing out, or FOMO. And a lot of you are nudged and pushed by these two factors.
Take the example of the surge in the registration for demat accounts in India. For years, the total accounts opened hovered around 2 to 2.5 crore. Over the past couple of years, that has zoomed to over 6.5 crore between the two depositories. Most brokerages believe that young people have taken to stock market trading and investing while sitting at home during the pandemic.
There is interest in investing through mutual funds too. Folios of mutual funds have grown sharply over the past few years. Flows into equity mutual funds are healthy and act as a cushion whenever global markets are volatile.
As a nation, we can perhaps celebrate the increased interest of people in the stock markets. However, there is a need to proceed cautiously. A lot of youngsters are attracted by the money made by others. The FOMO factor pushes them. You do not want to miss out. Similarly, since everybody in the peer group is making money, you would like to do so too.
For years, most Indian households invested in intangible assets. As many as 88 per cent of them bought real estate and gold, according to a survey by the Reserve Bank of India’s committee on Household Finance conducted in 2017. Most households had little exposure to equity markets. They chose real estate and gold over equity. That is an example of ‘ambiguity aversion’, an aspect of behavioural finance. When selecting an option, you tend to pick what you perceive, or know, has the least risk.
Most Indian households are stuck to assets that they can feel and see. They did not participate in financial markets. The sudden surge in the number of mutual fund investors and direct stock market investors means that people in India have put ambiguity aversion behind them. They have chosen to go ahead and invest in asset classes earlier thought to be risky.
If you go by the statistics put out in the Paytm IPO prospectus, you will see that the potential for equity market penetration is significant. India is yet to see the full potential of broader participation in equity markets by people.
What that means
Ambiguity aversion could be a good thing to carry forward while investing in equity assets. Those of you who have recently started to invest may want to take note of that. The way to deal with ambiguity aversion is to get proper knowledge and you can get past these hurdles. In the case of investing, many people are directly buying equity assets.
They ask friends whether a particular share is good to buy. The same applies to stock market trading too. You can take that up if you want it to be your primary source of income. You have to be completely into it. You cannot buy or sell shares on the side and expect to generate a sustainable income.
When it comes to IPOs, you need professional advice. An informal conversation may push you to make wrong decisions. You may want to know whether you should subscribe to an IPO offer or buy the stock after it is listed. If you get the allotment and the share price jumps, you may want to know if you should book profits or stay invested. There are tax implications of short-term selling of shares. You pay short-term capital gains on the profit you make. At the same time, that experience will make you put money into many other IPOs that may just not be worth your money.
You need to realise that investing in equity assets is for the long term. It is like planting a tree that takes years to grow and give fruits. And you may want to align all your equity investments to your financial goals.
6.5 cr Demat accounts active in India’s two depositories
88% of Indian households invested in gold or real estate in 2017
(The author is editor-in-chief at www.moneyminute.in)