Stock markets in India have seen humongous growth in the last three years -- from about 6,000 points in the country’s premier exchange BSE’s frontline ‘Sensex’ - in 2004 to 19,243 points ending this Friday (October 26, 2007), creating enormous wealth for the investors. Unfortunately, they are neither retail investors nor small investors -- who are averse to creatures like market swings, volatility, and have not developed even a reasonable appetite for risk-taking.  Even if they have gained any, it is nothing to brag about.

Retails investors still continue to invest their savings in traditional mode of investment medium like post office savings, bank deposits, NSCs and Bonds, besides traditional commodities like gold and silver.  If one were to account for yield or return on investment from these instruments, after providing for tax and inflation, they are not good enough to provide financial security. 

A recent survey “Invest India Incomes & Savings Survey 2007,” conducted by IIMS Dataworks reveals conclusively how retail investors have been running away from not only the market, but also from mutual funds. According to the survey, only 3.5 million Indians -- from a total working population of 321 million people under 18-59 years age group invest in stocks.  Overall, only 7.2 million people invest in stocks, either directly or through mutual funds, which works out to just 2 per cent of the total working population.

Still allergic
In this context, the latest RBI data also reveals that only 5 per cent of the total savings finds its way into the securities market including equities, Gilts, MF as against 34 per cent in the USA.

The moot question is that when India is poised for growth, why retail/small investors be left out? For this to happen, Amitabh Chakravarty, President, Religare Securities - Equity avers: “Retail investors need to learn to live with volatility at this level of market.”
Even as the very ‘volatility’ factor may rise eyebrows of some middle-class salaried segment, it is to be understood that it is a regular feature of a stock market anywhere in the world and India is no exception (see, box). 

Let’s accept that India is yet to perfect the art of managing a couple of billions of inflows. Currently, it is definitely not capable of absorbing the inflows, and until such time an effective routing mechanism is evolved to manage the inflows away from traditional equities, investors -- retail or small -- India will have to live with this devil called volatility.

Event risks
Retail investors should realise there are other creatures in this stock market jungle which the retail investors will have to get used to and see them as integral part of market economy.  They could be summed up as event risks such as a political uncertainty, terrorist attack or a new regulation.

Even if you were to call this a scam, the domestic stock markets in India by now are quite used to scams and have not only surged past every time it occurred but also grown in strength. This Friday’s market closing past 19,000 mark and in all probability crossing the 20,000 milestone before Diwali, should suffice to say that the bourses in India can grapple with scams with a lot more ease.

More transparency
SEBI’s latest change in rules dealing with FII investments in India will make the domestic market more transparent and a safer investment destination for investors of all hues - retail or otherwise - aimed at de-risking Indian market.  Now that SEBI has allowed entities like unregulated pension funds, foundations, colleges endowments and university foundations to register as FIIs, when they decide to come and given the nature of their investment mandate of staying invested between 3-5 years, these should augur well for the markets in containing volatility, if not eliminate it altogether, to mature further. 

Retail investors should first and foremost realise that the small investor is a myth and at best a concept conceived to keep the society lulled in the belief that there is great concern for the small investor, but rest assured that nothing could be further from the truth and there is no one to hold the hand of a small investor and put him on a safe-investment alley. 

Besides, the very system abhors smallness. For instance in mutual funds, despite the lip-service that most funds pay to retail investors, the structure is actually loaded against the retail investor, with over 60% of subscriptions still coming from corporates.  SEBI had to step in recently to ensure that small investors get some relief.  Given such a scenario, a retail investor should take a long or medium term view and stay invested.

Retail investors should always look for a long term perspective of how to invest in safe sectors like real estate, pharma etc rather than sectors like IT and textiles which can suffer due to a strong rupee. In fact, they should learn how best one can hedge over frequent volatility and stay invested with a clear horizon and a yield target.
Rather than that erratic doubling, the concept should be strictly a healthy yield-target depending on which sector you look at.  For instance, in a fast moving sector like, say, real estate the yield can be as much as 30 per cent a year. 

For other sectors, a yield of about 20 to 23 per cent can be more than optimistic.  Interestingly, anything more than that can be a hedging tool.  In the sense, you invest Rs 100 in a stock ‘X’ on January 1, 2007 and on January 1, 2008 say that the yield is 40 per cent, and then you have Rs 140 in your portfolio.  At this stage, you can book profit up to say Rs 25 and invest that in some other emerging stock, which in turn will give you a new yield appreciation with a separate identity to your original stock.

Pawan Gupta, a practicing chartered accountant in Mumbai, recalls how his father booked profits when Colgate gave bonus and bought Reliance shares at one point of time and when it gave bonus, he booked profits and bought Hindalco, and over a period of some years, his father amassed a huge portfolio, as would a traditional Marwadi with a shrewd mind.

So the lesson to be learnt by a retail investor is: “Seeking yield is good, but not the greed.”