Share prices are driven by greed and fear. It is a fight between two powerful emotions. Investors and traders in India and abroad are tracking Indian equities more closely than ever. That is reflected in the rising participation of retail and foreign investors in Indian markets. The latest data from the National Stock Exchange shows that the market capitalization to gross domestic product ratio of the Indian stock markets was never so high.
Indian shares are trading at a much higher value than the GDP at 125%. The number of unique investors on the NSE is at 9.5 crore. According to the latest monthly bulletin, the stock exchange also claims global dominance in the Equity Index Options segment, with a 98% global share in contracts traded in May 2024.
Benchmark indices like the Sensex and the NSE Nifty are at a record high. India’s equity options are traded as if no other derivative instruments exist worldwide.
The sentiment about Indian equities is primarily driven by the long-term stability and growth that the Indian economy offers to investors.
While you feel good about the euphoria, there are many things to read, learn, and see, rather than just put your money into it. You do not need to dive deep or sign up for online courses. You can do that by monitoring public information. You need to know the right things to look out for before you do any transaction. Knowledge is often the best way to protect yourself against market risks. Understanding the risks could help you move to the next level regarding wealth creation.
Two significant risks were flagged in regulatory data published recently. One was related to derivatives markets, and another was related to the trend in mutual fund investments.
After the latest board meeting, the Securities and Exchange Board of India announced that it could introduce restrictions on the derivatives markets, and the regulator could take some products off the market.
Nithin Kamath took to social media to highlight that the regulatory risk is the biggest for the stockbroking industry. He quoted data that said the index options segment had grown too fast, too soon. The share of retail investors in the segment is now over 40% from around 2% six years ago.
He also admitted that many stockbrokers earned a high revenue through brokerage due to the surge in options trading. “The times will be tough for the broking industry going forward because almost everyone’s business model is skewed towards earning from options,” he said. That is terrible news for listed companies in the stockbroking segment that rely on derivatives-linked brokerage.
The Reserve Bank of India also published the latest financial stability report. It is an assessment of risks to the economy by the central bank in India. Overall, the risk flagged by the RBI is moderate across parameters like geopolitical risk, macroeconomic conditions, capital outflows and exchange rate risks. The data on the equity mutual fund industry is worth taking note of. The RBI report says more money flows into relatively risky sectoral and thematic funds than diversified equity funds.
The latest NSE monthly bulletin data shows that a third of equity mutual funds originate in Maharashtra. While there is a dramatic surge in direct equity investing registration through demat accounts across the country, the mutual fund industry remains skewed, with Maharashtra and Gujarat dominating the equity flows. Diving deeper into these numbers, one can see that only 11% of the R32 lakh crore equity assets under management are through passive funds that track a benchmark index.
Most of the money flows into relatively risky, actively managed funds. That shows individuals are willing to risk their savings through direct investing.
Sunil Singhania of Abakkus Asset Managers had a successful career as a fund manager with the then Reliance Capital Mutual Fund. he recently said that you should spend more time on research and less time allocating money in the bull market. You must engage a professional advisor to support your endeavour.
Rajas Kelkar
(The author is editor-in-chief at www.moneyminute.in)