Why Indians don’t Invest in the Equity Market

    • By,
      Akshat Joshi – Student, Kautilya

“Never ask a woman her age or a man his salary.” This quintessential proverb demonstrates India’s lack of financial literacy, where people don’t like to discuss their salary, savings, and investments. How many people in India know the investments or asset holding of their parents, their relatives, or even their spouse? What do Indians do with their savings? Why don’t Indians invest in the equity market?

India aspires to be a ‘ Vishwa Guru.’ For doing so, we must work on areas of wealth creation to increase per capita income. Comparing India and the world, only 0.18% of people in India invest in Equity. In contrast, this number is 55% in USA., 15% in Japan, 14% in Germany, 12% in the United Kingdom, and 7% in China. Can we assume that investing in the equity market is an excellent way to increase your savings over a period of time? Indians are good at savings. Let us understand the traditional areas where Indians invest their savings –

  • Gold – India has a cultural linkage with gold. It is used as an ornament in marriages as well as daily use, making it one of India’s largest good imported goods. The average gold return has been 9% in the past 40 years. While there are security issues (housebreaking, theft, and burglary), people buy expensive lockers either at home or banks to preserve them.
  • Fixed Deposits – Indians are risk-averse, and FDs are considered to be the safest form of investment. Since they are taxable, the average return on an FD is usually around 5%, adjusting it to inflation yields negative returns, making them the worst investments in today’s world.
  • L.I.C.- Life Insurance Corporation of India is a Public Sector Undertaking that provides returns of around 7%. When adjusted to inflations, this sometimes yields negative returns. Liquidity is another drawback of such investments.
  • Land Property- This is a somewhat risky investment. India has fragmented land, with most of it being inheritance property. Although an intelligent investment can create wealth, other law and order issues like encroachments are risky.

Having understood all these areas, would an Indian want to invest in Equity? Are Indians literate about the Equity market and its functioning? Out of 1.4 billion in India, only 1.4 million pay income tax, and 7.7 million people invest in Equity. The number of Demat accounts has doubled in the last two years (3.6 million in 2019), as per SEBI.

So, what about these 7.7 million people? How do they invest? Five states of India constitute about 53% of the total investors. Awareness programs and skill shops at educational institutes, especially youth, can be a good policy instrument to reduce this disparity. Inclusivity is what we require. What is the amount invested? The market capitalization of BSE-listed companies has surpassed $3 trillion, making it the world’s ninth-largest stock exchange. This valuation shows the potential of the stock market in India. Imagine if 10% of Indians started investing; this number would grow exponentially. Investing in the long term can be a good source of income. The power of compounding differentiates investors from traders.

The benefits of investing in Equity include alternate sources of wealth creation, more liquidity, long-life income option, higher returns, and right over the asset. Your money is your choice; invest wisely! It can significantly contribute to the Indian G.D.P.

This generation has started investing the majority of investors are below 40. India is a young country with an average age of 25 years. However, most of them are pandemic traders and have limited knowledge of trading jargon like P.E. ratio, R.O.E., etc. Few book their losses and never enter Equity for fear of losing money, which makes this the right time to promote this habit in Indians. The potential of the equity market is still undermined and undiscovered. Add to that, the growth of digital literacy in our country. One can invest piles of savings at any equity share from the comfort of his home. We have mobile apps and websites that have made investing easy to understand. Some solutions to boost investment can be financial inclusion and literacy, participation of women in the workforce as they constitute half of India’s population, and the participation rate is decreasing. Another policy measure can be tax benefits for investors. With all the risks associated with Equity, it gives a better return than any asset class in the long run.

I believe economic development is the bedrock of a sustainable improvement in the condition of people and the planet.

Investing in Equity means investing in your future.

*The Kautilya School of Public Policy (KSPP) takes no institutional positions. The views and opinions expressed in this article are solely those of the author(s) and do not reflect the views or positions of KSPP.