The countdown to India’s 63rd Independence Day has begun and what could be a better time than this to get into retrospection mode. We at SundayET have always been a step ahead when it comes to the small investor’s interest - in other words your interest. And this time, we decided to try and figure out if the small investor in India had really arrived big time, as is sometimes made out to be, or are some of the myths around Dalal Street more hype and hoopla? Has the golden age actually started for the Indian small investor - or is it waiting in the wings? How far away are we from financial freedom?
At first sight, it surely seems that retail investors have things cut out for them and life was never so good. From mutual fund investments to putting money in stocks, buying an insurance policy, buying or investing in real estate or filing tax returns, all the deals that one can possibly think of are simple and painless. However, the flip side is that this is just the beginning and a lot remains to be done. In fact, investors can and should expect better facilities and new products for investment and risk management going forward.
Looking for landmarks that have helped play out the freedom theme for Indian investors - the recently launched new pension scheme (NPS) immediately comes to mind. It has brought cheer to many private sector employees, since now they too can avail themselves of pension facilities, which were earlier available only to government employees.
In fact, one of the most important reasons for seeking out jobs in the government sector was the assured pension that would come after retirement. But now, any citizen of India can invest in this product to help secure their old age. There were several pension funds in the market such as public provident fund (PPF) and employee provident fund (EPF) and numerous other schemes offered by mutual funds and insurance companies.
But the problem with those was that the returns from PPF and EPF are relatively lower and schemes offered by mutual fund and insurance companies are costlier than NPS. NPS is a more efficient product and gives the freedom to investors to participate both in equity and debt markets depending on their risk profile. The flip side to it is that the returns are taxable and since, there is not much incentive for distributors, the benefit may remain confined to a few informed investors only.
Moving to the stock market - there’s been a sea change there in the last few decades, which is all about more power to the investors. Now there’s freedom from floor trading and physical share certificates. In fact, the very hallmark of Dalal Street - where brokers bought and sold shares by out crying - is, as we all know, a thing of the past.
Flashback to those days - the major difficulty that investors faced was to sell or buy at a particular price. The prices kept changing and one couldn’t sell all shares at a given price. Brokers used to take a long time to execute the complete trade in case the quantity was big - due to lack of liquidity. After the execution of trade, investors had to wait for a month for the share certificate. And then they also faced hassles regarding the transfer of ownership as investors needed to affix transfer stamps and then had to send them to the respective registrar & share transfer agents.
Investors had no option but to wait for around a month again for ownership transfer to happen. So surprise really that many investors, preferred to put money in fixed deposits rather than investing in shares. The average transaction time was more than a fortnight. Investors could not buy single shares as the lot sizes were higher and generally, used to be in the range of 50 to 100 shares.
Of course all that is history, today it’s electronic trading. National Stock Exchange was first one to go electronic. Investors have the freedom to buy or sell from anywhere with the help of the Internet. In fact, the impact cost has also come down substantially. Investors no longer need to struggle with share certificates as all the shares are in electronic form. And best of all, overall cost of transaction in India is probably the lowest in the world. Welcome to the world of demat!
Why is it then that every small investor is not jumping into the equity bandwagon. More than 3/4th of the trading is done by corporates and high net worth individuals and there is not much participation from retail investors. There is need for more depth and more participation from retail investors. While the move to bring down promoters’ holding to at least 75% will increase the float, it is not yet clear when that will actually happen.
According to Anup Bagchi, ED at ICICI Securities, investors have got freedom in terms of available instruments and easy and convenient transaction. The overall cost has also come down. Going forward many new instruments will come, which will help in better risk management.
While equity has become a buzzword among small investors, the Indian debt market remains shallow. Although, government bonds are liquid to a great extent but there is not enough trading volume as far as the corporate debt market is concerned. The total turnover of the Indian corporate debt market in the Bombay Stock Exchange was merely around Rs 6 cr on August 6, 2009, against a turnover of around Rs 7,000 in the equity category.
In fact, there is no direct participation from retail investors in the debt market as the ticket size is very high. Most of the time bonds are issued though private placement and in general participants are either high net worth individuals or institutional investors. Thanks to the debt mutual funds, retail investors have the freedom to participate in the debt market, however, indirectly. Going forward more debt instruments have to be launched to ensure direct participation of retail investors.
Remember the days of the stranglehold over the market by UTI Mutual Fund? MF investors have surely come a long way. They have seen the journey from a monopoly to more than a dozen asset management companies today. It was only in the 1990s, when private sector companies were allowed to set up shop to provide services, that the monopoly of UTI ended after more than two decades.
In the latter half of the 90s, mutual fund companies started giving account statements, these statements used to take months to reach to investors. Also, it used to take a fortnight for a dividend cheque to come to the investor. Investor awareness about the scheme was very limited as there was no offer document and periodic portfolio disclosure. Thanks to the Securities & Exchange Board of India (Sebi), which later made it mandatory to disclose the portfolios regularly.
In fact, the current move by Sebi - that mutual fund investors are not required to pay an entry load but have the freedom to decide the commission of distributor based on the quality of service that distributors give - has given more freedom to mutual fund investors. According to Jaideep Bhattacharya, chief marketing officer at UTI Mutual Fund, investors have got a lot of freedom during the last few years in terms of transparency and cost, however, such independence is only available in the mutual fund industry.
Going forward, experts think that there are lot many things to be done in the mutual fund industry. According to Piyush Surana, CEO at Shinsei Asset Management Company, the industry needs to grow from just selling products to selling solutions. It has to be a need based solution provider.
Like mutual fund, the life Insurance industry has scripted a similar story. Until recently it was a one-company industry. Life Insurance Company was the only player. Now investors are spoilt for choice and have options to buy an insurance policy from 22 insurance companies. According to G V Nageswara Rao, MD & CEO at IDBI Fortis Life Insurance, there has been drastic reduction in the cost.
The recent move of Insurance and Regulatory Development Authority on capping the total cost in ULIP to 300 basis points of the gross return will further make the industry cost competitive and beneficial for customers. Going forward investors can expect more simplified and convenient operational and sales process and hence the cost will be even cheaper.
As far as tax planning is concerned, although it is difficult to get freedom from paying taxes, but over a period of time rates have come down and exemption limits have gone up. For instance, now income up to Rs 1.5lakh is exempt, which was merely Rs 1lakh a couple of years back. Also, no longer its just investments in insurance and public provident fund give tax benefit but investors have several other options, such as equity linked saving schemes, ULIPs, NPS and FDs, to choose from.
No longer does one need to stand in queue but can file their tax returns online through e-filing. However, the system has to improve further as it takes a long time in getting the money back in case someone has paid more than the actual tax liability.
Buying and investing in real estate was also not so easy before. In fact, the focus on affordable segment by real estate developers and government has ensured there must be a house in every range. Until a year back, housing prices were starting from Rs 15 to 20 lakh, currently there are several projects, which assure to provide home at a price, which is as low as Rs 5 to 7 lakh.
Also, with many Internet sites coming into play it is easier to get virtual tours of the residences. The transaction time has also come down. While over the years investors have been empowered and given more freedom, yet a lot remains to be done, to give them full financial freedom.
At first sight, it surely seems that retail investors have things cut out for them and life was never so good. From mutual fund investments to putting money in stocks, buying an insurance policy, buying or investing in real estate or filing tax returns, all the deals that one can possibly think of are simple and painless. However, the flip side is that this is just the beginning and a lot remains to be done. In fact, investors can and should expect better facilities and new products for investment and risk management going forward.
Looking for landmarks that have helped play out the freedom theme for Indian investors - the recently launched new pension scheme (NPS) immediately comes to mind. It has brought cheer to many private sector employees, since now they too can avail themselves of pension facilities, which were earlier available only to government employees.
In fact, one of the most important reasons for seeking out jobs in the government sector was the assured pension that would come after retirement. But now, any citizen of India can invest in this product to help secure their old age. There were several pension funds in the market such as public provident fund (PPF) and employee provident fund (EPF) and numerous other schemes offered by mutual funds and insurance companies.
But the problem with those was that the returns from PPF and EPF are relatively lower and schemes offered by mutual fund and insurance companies are costlier than NPS. NPS is a more efficient product and gives the freedom to investors to participate both in equity and debt markets depending on their risk profile. The flip side to it is that the returns are taxable and since, there is not much incentive for distributors, the benefit may remain confined to a few informed investors only.
Moving to the stock market - there’s been a sea change there in the last few decades, which is all about more power to the investors. Now there’s freedom from floor trading and physical share certificates. In fact, the very hallmark of Dalal Street - where brokers bought and sold shares by out crying - is, as we all know, a thing of the past.
Flashback to those days - the major difficulty that investors faced was to sell or buy at a particular price. The prices kept changing and one couldn’t sell all shares at a given price. Brokers used to take a long time to execute the complete trade in case the quantity was big - due to lack of liquidity. After the execution of trade, investors had to wait for a month for the share certificate. And then they also faced hassles regarding the transfer of ownership as investors needed to affix transfer stamps and then had to send them to the respective registrar & share transfer agents.
Investors had no option but to wait for around a month again for ownership transfer to happen. So surprise really that many investors, preferred to put money in fixed deposits rather than investing in shares. The average transaction time was more than a fortnight. Investors could not buy single shares as the lot sizes were higher and generally, used to be in the range of 50 to 100 shares.
Of course all that is history, today it’s electronic trading. National Stock Exchange was first one to go electronic. Investors have the freedom to buy or sell from anywhere with the help of the Internet. In fact, the impact cost has also come down substantially. Investors no longer need to struggle with share certificates as all the shares are in electronic form. And best of all, overall cost of transaction in India is probably the lowest in the world. Welcome to the world of demat!
Why is it then that every small investor is not jumping into the equity bandwagon. More than 3/4th of the trading is done by corporates and high net worth individuals and there is not much participation from retail investors. There is need for more depth and more participation from retail investors. While the move to bring down promoters’ holding to at least 75% will increase the float, it is not yet clear when that will actually happen.
According to Anup Bagchi, ED at ICICI Securities, investors have got freedom in terms of available instruments and easy and convenient transaction. The overall cost has also come down. Going forward many new instruments will come, which will help in better risk management.
While equity has become a buzzword among small investors, the Indian debt market remains shallow. Although, government bonds are liquid to a great extent but there is not enough trading volume as far as the corporate debt market is concerned. The total turnover of the Indian corporate debt market in the Bombay Stock Exchange was merely around Rs 6 cr on August 6, 2009, against a turnover of around Rs 7,000 in the equity category.
In fact, there is no direct participation from retail investors in the debt market as the ticket size is very high. Most of the time bonds are issued though private placement and in general participants are either high net worth individuals or institutional investors. Thanks to the debt mutual funds, retail investors have the freedom to participate in the debt market, however, indirectly. Going forward more debt instruments have to be launched to ensure direct participation of retail investors.
Remember the days of the stranglehold over the market by UTI Mutual Fund? MF investors have surely come a long way. They have seen the journey from a monopoly to more than a dozen asset management companies today. It was only in the 1990s, when private sector companies were allowed to set up shop to provide services, that the monopoly of UTI ended after more than two decades.
In the latter half of the 90s, mutual fund companies started giving account statements, these statements used to take months to reach to investors. Also, it used to take a fortnight for a dividend cheque to come to the investor. Investor awareness about the scheme was very limited as there was no offer document and periodic portfolio disclosure. Thanks to the Securities & Exchange Board of India (Sebi), which later made it mandatory to disclose the portfolios regularly.
In fact, the current move by Sebi - that mutual fund investors are not required to pay an entry load but have the freedom to decide the commission of distributor based on the quality of service that distributors give - has given more freedom to mutual fund investors. According to Jaideep Bhattacharya, chief marketing officer at UTI Mutual Fund, investors have got a lot of freedom during the last few years in terms of transparency and cost, however, such independence is only available in the mutual fund industry.
Going forward, experts think that there are lot many things to be done in the mutual fund industry. According to Piyush Surana, CEO at Shinsei Asset Management Company, the industry needs to grow from just selling products to selling solutions. It has to be a need based solution provider.
Like mutual fund, the life Insurance industry has scripted a similar story. Until recently it was a one-company industry. Life Insurance Company was the only player. Now investors are spoilt for choice and have options to buy an insurance policy from 22 insurance companies. According to G V Nageswara Rao, MD & CEO at IDBI Fortis Life Insurance, there has been drastic reduction in the cost.
The recent move of Insurance and Regulatory Development Authority on capping the total cost in ULIP to 300 basis points of the gross return will further make the industry cost competitive and beneficial for customers. Going forward investors can expect more simplified and convenient operational and sales process and hence the cost will be even cheaper.
As far as tax planning is concerned, although it is difficult to get freedom from paying taxes, but over a period of time rates have come down and exemption limits have gone up. For instance, now income up to Rs 1.5lakh is exempt, which was merely Rs 1lakh a couple of years back. Also, no longer its just investments in insurance and public provident fund give tax benefit but investors have several other options, such as equity linked saving schemes, ULIPs, NPS and FDs, to choose from.
No longer does one need to stand in queue but can file their tax returns online through e-filing. However, the system has to improve further as it takes a long time in getting the money back in case someone has paid more than the actual tax liability.
Buying and investing in real estate was also not so easy before. In fact, the focus on affordable segment by real estate developers and government has ensured there must be a house in every range. Until a year back, housing prices were starting from Rs 15 to 20 lakh, currently there are several projects, which assure to provide home at a price, which is as low as Rs 5 to 7 lakh.
Also, with many Internet sites coming into play it is easier to get virtual tours of the residences. The transaction time has also come down. While over the years investors have been empowered and given more freedom, yet a lot remains to be done, to give them full financial freedom.
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