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Stock markets: Don't be afraid - Views on News from Equitymaster
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  • Jul 8, 2003

    Stock markets: Don't be afraid

    The Indian investor is a resilient lot as can be witnessed in the recent rally. Despite the rally, the real picture is not so encouraging. Statistics reveal that the percentage of household savings that actually go in to the capital markets, i.e. shares and debentures is very minimal. In the five years between FY95 and FY01, only 5% of the total household savings went towards investments in shares and debentures.

    The number mentioned above includes investments in mutual funds also. Bulk of the money flow in the last 3-4 years have been channeled into debt mutual funds, which have been in the limelight in the light of a falling interest rates scenario. Whereas, equities have been a neglected segment for quite a while despite compelling reasons for an investor to allocate a larger portion of the investible surplus in stock markets. As usual, retail investors jump into the bandwagon only after stock markets have rallied noticeably. This pessimism is not without reason. The Indian public has been exposed to a lot of scams in the stocks markets and this has made them risk averse.

    Ratio of assets of open-ended funds to GDP
    Figures in % 1999 2000 2001
    Brazil 22.1 25.0 25.2
    Denmark 15.8 20.2 18.9
    Korea 41.1 24.0 32.5
    India 2.9 3.0 N.A
    UK 66.5 61.8 48.7
    US 73.8 70.9 63.6

    Even if investors have burnt their fingers by basing equity investment decisions on some 'khabars' in the past, there is hesitancy towards mutual funds as well. When compared to developing as well as developed countries, investments in mutual funds in India is still very low. The table above illustrates the same. For any stock market to be vibrant, there has to be a lot of retail investor participation. For example, every one in two households in the US have investments in mutual funds. The depth of investments in mutual funds is so much so that the number of mutual funds in the US exceeds the number of listed shares in the US markets.

    The cue that we want to give retail investors at this stage are that equities present better return prospects, as has been proved globally. However, at the end of the day, we must emphasise the fact that investors can look forward to better returns from the stock markets only in the long term. Also, it is very important to be realistic while investing in the stock market. Give some time and effort to your investments and they will bear fruits for you.



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