Equity Investment: India's Participation And Prospects

India has witnessed a surge in the number of stock market investors, with around 87 million investors as of January 2024, up from 17.9 million in 2015. However, this only translates to around 3% of the Indian population investing in the stock market, compared to 13% in China and 55% in the US. This discrepancy is partly due to cultural factors, with Indian households preferring tangible assets like real estate and gold, which make up 66% of household assets. Additionally, only 7% of household income is invested in equities, compared to an average of 30% for other emerging markets. This conservative approach to investing is also reflected in the low percentage of female investors in the Indian stock market.

Only 3% of Indians invest in the stock market

Despite India's impressive economic growth, only a small fraction of its population chooses to invest in the stock market. As of 2023, just 3% of Indians invest in stocks, a stark contrast to the 13% in China and 55% in the US. This low participation rate in the stock market is indicative of a broader cultural and psychological aversion to risk among Indians, who traditionally favor tangible assets like real estate and gold.

The National Stock Exchange (NSE) CEO Ashishkumar Chauhan highlighted that there are approximately 80 million unique investors in the Indian stock markets through the NSE, translating to about 17% of Indian households. This figure represents a notable increase in recent years, driven by the growing use of mobile phones and trading apps. However, it still signifies a minuscule proportion of India's vast population.

The low participation in the stock market can be attributed to several factors. Firstly, Indians have a strong preference for physical assets that they can touch and feel. Real estate and gold account for a significant portion of household assets, with real estate alone making up 51%. This is followed by gold, which holds a respectable 15%. Bank deposits are also favored, constituting 14% of total household assets. These traditional investment choices are deeply rooted in Indian culture, with gold, in particular, holding cultural and emotional value.

Secondly, there is a perception among Indians that investing in the stock market is akin to gambling. This perception, coupled with a lack of trust in the stock market, leads many to opt for what they consider safer and more familiar investment options. The trust deficit is a critical issue that needs to be addressed to encourage greater participation in the stock market.

Additionally, the Indian stock market has historically lagged due to a mismatch between equity pricing and the economy. However, with recent economic reforms and a booming economy, this gap is expected to narrow, fostering the growth of the stock market.

The low participation rate of 3% presents both challenges and opportunities for India. On the one hand, it indicates that many Indians are missing out on the potential rewards of investing in equities, which can help them grow their wealth and secure their financial future. On the other hand, it also suggests that there is ample room for growth and development in the Indian stock market. As more Indians recognize the benefits of investing in equities and become financially literate, the country's equity market is poised for significant expansion.

To increase stock market participation, it is essential to build trust and confidence among Indians. Regulatory bodies and market participants play a crucial role in this regard, and efforts should be made to enhance transparency and simplify investment processes. Additionally, promoting financial literacy and educating Indians about the benefits of investing in equities can help dispel misconceptions and encourage more people to consider the stock market as a viable investment option.

17% of Indian households invest in stocks

While India's economy is thriving, with a healthy growth rate of between 6.5% and 7.5%, and a healthy inflation rate of between 4.5% and 5%, the percentage of the population investing in the stock market is low. Only around 3% of the population invests in stocks, compared to 13% of the Chinese population and 55% in the US.

However, the number of Indian investors is rising, with a steady increase in the number of stock market investors. This is due in large part to the popularity of smartphone-based investment apps. As of January 2024, there were around 87 million investors, compared to 17.9 million in 2015. This equates to 17% of all Indian households investing in the stock market.

The state of Maharashtra has the highest percentage of stock market investors, with 17.4%. This is a significant shift from the traditional preference for physical assets, such as gold and real estate. While gold and real estate investments are still high, at 15% and 51% respectively, the rise in stock market investors is notable.

The increase in investors is also attributed to the rise in mobile phone usage and the growing popularity of trading apps. This is a positive shift for the country's economy, as more investors mean a stronger stock market, which will encourage businesses to flourish and expand.

Despite the rise in investors, there is still a perception of stock market investing as gambling, and many prefer the traditional methods of investing in gold or fixed deposits, which are considered safer. There is also a strong preference for tangible assets, which is a common mindset for Indian households.

Indian households invest 7% of income in equities

Indian households invest only 7% of their household income in equities, according to Gaurav Patankar, an analyst at Bloomberg Intelligence. This is significantly lower than the global average for emerging markets, which stands at 30%. In comparison, Latin American households invest 40% of their income in equities, while US households invest 50%.

The low percentage of Indian household income invested in equities could be attributed to several factors. Firstly, many individuals in India are uncomfortable with the level of risk associated with stock investments, particularly older individuals who may still carry the scars of past stock market scandals. Secondly, investing in insurance has been a popular tax-saving strategy for many years, and insurance companies also invest a portion of their funds in stocks. Thirdly, the National Pension System and the Employees' Provident Fund Organisation (EPFO) in India provide indirect investment in stocks, with the EPFO investing 15% of contributions in exchange-traded funds (ETFs) that invest in stocks.

While the number of unique investors in the Indian stock market is rising, currently sitting at around 80 million, this only translates to 17% of Indian households, or 3% of the Indian population, investing directly in the stock market. This is much lower than the percentage of investors in other countries, such as China, where 13% of the population invests in stocks, and the US, where 55% of the population does so.

Despite the low direct investment in equities by Indian households, there is a growing trend of indirect investment through mutual funds (MFs). MFs have become more popular since they were allowed to use celebrities in their advertisements in 2017, with campaigns such as "Mutual Funds sahi hai" featuring well-known figures. This has likely contributed to the increase in outstanding investments in MFs, which jumped from 5.9% of India's GDP in 2019-20 to 8.7% in 2022-23.

India has 87 million investors

India has witnessed a rapid increase in the number of investors in its stock market, with a total of 87 million investors as of January 2024, a significant jump from 17.9 million in 2015. This growth can be attributed to the rising popularity of smartphone-based investment applications. Despite this surge, the percentage of Indian investors in the stock market remains relatively low at around 3% in 2023, compared to 13% in China and 55% in the USA.

The National Stock Exchange (NSE) of India, established in 1992 and located in Mumbai, plays a crucial role in this evolving landscape. NSE is the country's largest stock exchange, with over 1,750 listed companies, and it has become one of the top three stock exchanges globally in terms of transaction volume. According to NSE MD & CEO Ashishkumar Chauhan, there are approximately 80 million unique investors in the Indian stock markets through NSE, representing 50 million unique households, or 17% of all Indian households.

While the growth in the number of investors is encouraging, it is important to note that Indian households have traditionally favored physical assets like real estate and gold over financial assets. This preference is reflected in the breakdown of household assets as of March 2023, where 66% was tied up in physical assets, with real estate accounting for 51% and gold making up 15%. In contrast, financial assets like bank deposits, insurance, and pension funds made up smaller portions of household wealth.

The perception of stock market investing as gambling and the preference for tangible investments have contributed to the relatively low participation in the equity market. However, with India's strong economic growth and the increasing popularity of trading apps, there is potential for a shift towards greater equity market participation. The mutual fund industry has already experienced significant growth over the past decade, indicating a gradual evolution in investment preferences.

The National Stock Exchange (NSE) is India's largest stock exchange

The NSE was incorporated in 1992 and launched in 1994. It is based in Mumbai and is owned by a consortium of India's leading financial institutions, including banks and insurance companies. It was established to bring greater transparency to the Indian equity markets and is a pioneer in the country's financial markets. The NSE was the first exchange in India to introduce an electronic trading facility, and it has since become the largest private wide-area network in the country.

The NSE offers a robust market infrastructure and is considered a driving force behind India's economic growth. It has high standards of operation and corporate governance, reflecting its focus on investor protection and access to capital. The exchange supports over 2,500 Very Small Aperture Terminals (VSAT), making it the largest private wide-area network in India.

The NSE has played a crucial role in increasing the number of investors in the Indian stock market. According to the NSE CEO, there are around 80 million unique investors in the Indian stock markets through the NSE, representing about 17% of all Indian households. The rise in investors is attributed to increased mobile phone penetration and the growing popularity of trading apps.

The NSE provides a premier marketplace for companies seeking to list on a major exchange. The high volume of trading activity and the use of automated systems promote transparency in trade matching and the settlement process, boosting market visibility and investor confidence.

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