Pavni, a 24-year-old fresher, has developed an interest in trading through online apps after her uncle introduced her to them. She now looks forward to discussing trading and investing with her uncle. Furthermore, she browses various internet forums in order to pick up some new tips and tricks.
Millions of young Indians like Pavni, have begun to take a keen interest in trading and investing in the bourses—and that is a good thing. The trend says that the members of generation Z (18-24 age) and the millennials (25 to 40) have overtaken the baby boomers in driving India’s stock market. In fact, a SBI June report recorded a significant surge in the number of individual investors in the market by 142 lakhs in FY21, with 122.5 lakh new accounts at CDSL and 19.7 lakh in NSDL.
As young investors increasingly join the cohort, the market gurus are getting fascinated with this trend. “We are just getting started! Honestly, welcome to the new India, where owning a house is being treated at par with owning stocks, at least for our generation. And that is the way one should always look at it. And I am not boasting, just look at the numbers,” comments Siddarth Kothari, Chief Investment Strategist at the Om Kothari Group.
India has 6.9 crore demat accounts as of June 2021. In January 2021, India’s total demat accounts stood at 51.5 million or 5.15 crores in comparison with 4.08 crores in FY2020 and 3.59 crores in FY19.
Meanwhile, Upstox, which is a discount brokerage, declared a few months ago that more than 70 per cent of its 4 million customer base are first time investors and under the age of 36. Similarly, Groww, a web-based funding platform saw a spike in the number of new investors since 2020. The officials of the company state that there was a 206.08 per cent growth in first-time investors in 2020 and a 94.53 per cent growth in just two quarters of 2021.
Market expert Naveen Chandramohan, Founder & Fund manager at ITUS Capital is also very thrilled about how the market is reacting these days. “The stock market is an auction driven market. As long as there are more buyers than sellers, the markets will move up. The interesting trend for the first time is that millennials and members of GenZ are entering the markets – I believe this is a very healthy sign,” he comments.
What are they investing in
If we go back 15 years, the millennials when they graduated, usually started their careers with the ambition of buying their own houses one day. Today’s generation have a different set of priorities – entrepreneurship, lifestyle, investing being integral parts of the same.
“This is a phase that every developing economy goes through, and ours is no different. Markets will take the new sets of investors through cycles, and you will have an entirely new set of reactions from them – all of these will be seen over time,” says Chandramohan as he talks about the decreasing age of the investors and the various patterns that are emerging in the arena of monetary investments.
Millennials and Gen Z are sui generis, yet they follow conventional methods in taking advantage of the new asset classes, stocks and sectors. If we go by the trends, the most visible behaviour is that the young investors are bridging the gaps between the new and old investment strategies.
One of these classic strategies is that of holding stocks. These investors also believe in holding stocks and value stability. A survey by investor advisor, The Motley Fool found that Gen Z investors more than the millennial investors own stocks and hold them. While the millennials like to invest more in mutual funds as compared to the Gen Z investors.
Then young generation adore technology stocks and big names such Facebook, Netflix and Twitter are always on their list. While there are plenty of stocks available from the renowned tech giants, investors do like to flock towards tech stocks that are speculative. For instance, take the Zomato IPO. The Motley Fool survey noted the same pattern, 40 per cent of the respondents were holding IT stocks and 38 per cent had invested in the high-tech and emerging technology sectors.
Cryptocurrency is also becoming another asset to invest in and is the third most popular investment option after stocks and mutual funds. According to the same survey, 40 per cent of the stock investors aged 18 to 40 own cryptocurrencies. 47 per cent of the Gen Z and 39 per cent of the millennial respondents said that they hold this new asset. After cryptocurrency, investors prefer bonds and stock options as their 4th and 5th options for investing, as per the survey.
What we need in our country is equity participation and increased penetration (which is a sign of increased financialization) and Chandramohan sees this as an extremely positive trend.
Daring young investors are also directly buying retail stocks rather than betting on mutual funds first.
Buying directly at the bourses
It is not that investors are not interested in mutual funds, in fact MFs are doing great. In a record run, MF investors have shelled out an all-time high of $1.4 billion (Rs 103.5 billion) in September as per the Association of Mutual Funds in India. However, people are more interested in buying shares directly nowadays. According to Bloomberg, Indian companies raised approximately $10.8 billion in first-time share sales this year.
The reasons are various. The first one being economic.
Many blue-chip shares were available at multi-year lows after a sell-off in March last year. Some of the most battered large-cap stocks, such as Reliance Industries and State Bank of India, have more than doubled in price since March.
“An investor like me won’t go with a mutual fund in this scenario, especially large cap mutual funds. I’d prefer to invest directly,”
stated Ashish Mishra, a retail investor based in Gurgaon to Reuters. Then with MFs, there are no free lunches. As stocks are bought and sold on an investor’s behalf, it involves high management charges. Refinitiv Lipper data shows that the average return over a 3-year period for the 498 mutual funds surveyed was 2 per cent, much lower than the 12 per cent return for the NSE Nifty 50 index in that period, which indicates that mutual funds provide low returns. That is why there is a growing aversion towards MFs.
Also, those investors who bought stocks during the pandemic, gained back a good price, which gave further impetus to the trend of investing directly in the stock market.
COVID-19 is responsible as well
Market experts see COVID-19 as one of the reasons for the acceleration in stock market investments amongst today’s generation. This is also the reason for the significant surge in demat accounts, as millennials started dabbling with the stock market to overcome the financial crunch engendered due to the job losses and pay cuts during the pandemic.
Chandramohan elaborates, “I believe the financial markets have been a big beneficiary of COVID-19. Two years back, one would not have heard of Robinhood and today we are talking about a broker targeted towards retail being listed for a valuation in excess of US$ 40 billion with more than 50 per cent of its revenues coming from Crypto trading. So yes, COVID-19 was certainly one of the reasons for this trend.”
Millennials are better investors!
Although we have legendary investors from the older generation like Warren Buffet and activist investor Carl Icahn in the west and stock market kings like Rakesh Jhunjhunwala, Radhakishan Damani, Raamdeo Agrawal and Porinju Veliath here in India, many believe that the younger generation investors are more global and aware in their outlook, which makes them more enterprising. Also, the young people nowadays are more creative in terms of finding money making avenues, and this cocktail of education, technology, social media and curiosity is doing wonders for the stock market. At least Martha Stokes, CEO and Co-founder at TechniTrader and a Quora writer thinks so.
She posted, “I think it is wonderful that they are not waiting until they are near or at retirement to begin learning about the stock market. The millennials that I have spoken to or trained are amazing individuals. This generation had far more education than their parents, sometimes, not always. Their income was higher in many instances, and they have more than their parents had at an earlier age. They also want more out of their lives, and they love technology which is what the stock market is truly all about. Companies that IPO are often high-tech companies or new technologies.”
Other stock market experts also feel that technology and social media have only aided the momentum of people investing in the market.
“Technology is not just an enabler anymore; it is now a necessity when it comes to investing. I am quite surprised that one can now open a Demat account in a day and start investing right away. Gone are the days when a banker would come to our house to do piles of paperwork, digital is the buzzword now. Our government, with initiatives like Aadhar and Digilocker, has also played a big role in easing out this process,”
says Kothari. “Sadly, our education system does not provide us with ample weapons to fight off inflation. But luckily, entrepreneurs like Nitin/Nikhil Kamath (Zerodha), Ravi Kumar (Upstox), Abid Hassan (Sensibull) are taking charge and educating our population. Our social media feeds are filled with educational content around stock markets. Brokerages have transformed from an outbound to inbound approach in client acquisition. Look at how much our biggest discount brokerage, Zerodha has invested in marketing in the last decade, and you will understand the point I am trying to convey,” he further elaborates.
He also feels that the work from home culture has aided stock market activities. Indians in metro cities, who would usually spend hours stuck in traffic before the pandemic had set in, now have the luxury to work from home and devote a part of their time to financial planning, which most of them never did earlier.
Chandramohan, adding to that says, “The beauty of life is that it’s never one reason that drives a trend. It is a combination of factors. So, if you were to break down the factors that led to this, it would be a combination of the COVID-19 induced lockdown giving time to individuals to do things, the increased digitisation in the markets, a flourishing start-up ecosystem which has made disposable incomes go up and the average spending coming down as the lockdown made higher savings possible. All of these led to higher prices at the stock market.”
At the end of the day, we as humans need positive reinforcement, he added. “We like it when prices move up and we make money which brings more money into the system. It’s important not to isolate events into just one cause and effect but to understand the combination of interplays which are driving the market,” he says.
Trading apps making it easier
Playing the stock market can be a daunting task and the investors need to stay abreast of what is going on. Since many of them are first timers or have zero experience of the stock market, a bunch of trading start-ups—Zerodha, Groww, Upstox, 5paisa, Stockal and Fundfolio to name a few are making it effortless for them.
“I feel this is the right way to go for any trader in the world,” says Kothari when asked about investing through trading apps.
“With ease comes participation. The youth is restless, and brokerages have leveraged this aspect by providing them with the ease to transact from anywhere and at any point in time. One can even place a stock market trigger order at 12 in the night and sleep, while it automatically executes the next morning. Such has been the transformation in our country!” he marvels.
Kothari tells us about a banker who used to pitch products to his clients and how a trading app changed the course of his career. He opened a brokerage account with Zerodha and started studying from their Varsity initiative. Over time, he went into the depths of trading through free initiatives across brokerages and YouTube. He finally found his flair in options trading, left his banking job, and is now a full-time trader. All that without investing a rupee in any of the courses! Instead, he chose to spend his money in testing different strategies over time.
Chandramohan opines, “Investors want convenience, especially the new-age investor. They do not want to deal with friction and these apps are providing exactly the seamless interface that the investors want.”
It is a big market
Due to this a new market—that of trading apps, has come up in India. A market which is dominated by people who are not being forced to buy products, who do their own research and plan their investments online through AI-enabled platforms.
“I really appreciate the fact that so many entrepreneurs are now looking at this space. These apps are catering to specific consumer demands. Our country is massive and just a few players will not be able to cater to the load once we reach even half the American level of investments. It is healthy that we see a new trading platform coming in each week, it is very necessary for the ecosystem,” Kothari avers.
While Zerodha and Upstox are known for their simplicity, UI and Fyers are known for their algorithmic execution and AI capabilities. Platforms like Sensibull and Opstra cater to a niche derivates market, while those like IIFL, ICICI, INDMoney, and Kotak provide value when it comes to wholesome financial planning.
And indeed, these platforms are adding to the market value of the Indian brokerage industry, which is undeniably on a roll due to its growing retail share and income from interest payments and other fees. At the end of FY21, the stockbrokers raked in an income of Rs 27,500-28,500 crores, registering a 30-35 per cent growth. ICRA expects this growth to continue with the income reaching to Rs 29,500-30,500 crores, growing at a 7-8 per cent rate in FY22.
“What comes up is a function of where money flows. This is how flow of money works. Today, there are multiple trading apps and each one of them enables access. These have significant utility today,” says Chandramohan.
However, both Kothari and Chandramohan highlight a problem as well.
While these apps make stock marketing super easy and are rising in number, there is a downside there as well. “But do not bother by this rise, trust me there are many traditional brokerage houses that have been shutting shops as well,” points out Kothari.
“Today, many of the apps are getting subsidized through funding, so we will have more of these come into the markets,” says Chandramohan but he expects consolidation to come through. “A trading app per se does not build you any moat. How you build around the app, the consumers you acquire, the value you generate and the capital allocation from the promoters will build value. I see only a few players having the ability to do that at scale,” he forecasts.
Learning from mistakes
Be it the millennials, GenZ or the baby boomers, behind each of these investors is a human. We get motivated by the same cycle of fear and greed. Today, the notion that has set in is that equity investing is easy. Valuations go up daily. Learning from history makes us aware that making money is never meant to be easy unless you give it the benefit of time. Mistakes are inevitable and it is necessary to learn from them.
“I always tell an investor this –the first time you invest, I sincerely hope you lose money,” says Chandramohan. “You always tend to learn more through your mistakes. Its these errors that tell you about what kind of an investor you are. Today, when you make money, what gets asked is, is it due to luck or skill? That is the biggest lesson,” he asserts.
Kothari cautions investors to not spend their entire fortunes on the share market and to avoid mixing their investments with trading.
“The biggest mistake that any new investor, not necessarily the novices make is that they invest their entire savings when the markets are expensive, and into stocks that have already run up significantly. Another common mistake is mixing investments with trading,” he says.
So how do these mistakes hurt investors? We ask.
Most of these stocks are cyclical in nature, and when they go down, they fall sharply. Hence you will see this growth taking a backseat once the bear market sets in. But that is how it has always been, and will continue to be, he says. “What investors can do is devote time to study whatever they are buying. There is so much content on YouTube, Twitter, and on niche platforms, that one just needs to type in the name of a stock, and voila!” he points out.
Trading, which refers to short-term buy-sell decisions, is a cardinal sin for someone who is doing it passively. Going by tips and buying lots of futures and options, and then burning money are the common mistakes that many people continue to make. “As a passive investor, one should look at low-cost products as per their goals. Thanks to technology, we now have AI-enabled financial planners which can do this job for them in a jiffy!” Kothari asserts.
A positive for India
The trend will obviously impact our economy in a very positive way, opines Kothari.
Every investor adds to the market capitalisation of a company. Over time, as the market cap of our companies rises, and as our policies become even more accommodative, FDIs see more value in our country, thereby adding to the capital. This leads to economic expansion and job creation. Also, as the majority of our population gets to beat inflation over time by investing in the markets, they will be able to spend more, thereby pumping in even more capital into the economy.
A win-win for everyone, isn’t it? he asks.
“This is how every market evolves. You have new investors come in, they make money, they add more money, this results in greed and results in increase in leverage, which results in a wipeout. We have seen this story play out multiple times over and we will see the same again,” Chandramohan weighs in.
According to him, the Indian economy is on an extremely sound footing, which means that the money flow into India will continue to be robust. “Today, as an investor I believe that India continues to be the best risk reward geography and equities continue to be the best asset class (from a risk reward perspective). I do hold the view that the next 3-5 years will see significant inflows both from the domestic sphere and the FIIs,”he says.
On the other hand, financial markets see herd behaviour as a warning. Neelkanth Mishra, Co-head, Asia Pacific Strategy, and India Equity Strategist at Credit Suisse, explains in his blog dated 14th October which appeared in the Indian Express.
“The current rise of the Nifty is the highest without even a 10 per cent correction since 1992. This unbroken run itself is likely to have triggered larger and riskier investments, which are further pushing up stock prices. Herd behaviour and risk-appetite-accentuation do not just affect new and amateur investors — they affect everyone. Similar frothy trends are visible in the private funding markets, where investors are assumed to be more sophisticated, and the source of funds is mostly institutional,” he writes.
“Theoretically, an economy India’s size is capable of absorbing the $52 billion of PE funding seen over the last 12 months, but in practice, such a rapid surge creates allocation inefficiency. As investors rush to deploy ever-larger sums of money, they appear to be running out of companies to invest in that can productively deploy this capital. The result is companies’ valuations rising manifold within months and small firms getting more capital inflows than they can deploy, often resulting in wasteful business plans,” he further writes.
However, at this stage for the new and young investors, money flowing in is a good sign for the bull market. Overall, the trend will benefit financialization and will be good for the asset management industry in the country. However, at some stage, investors need to worry about risk and professional management too. So, the question is that is it a short-term boom and how much can we make out of this trend? As history has shown us, every trend fades eventually.
