Why are so many Indians piling into stocks?

bAND THE END March 2020, the number of people registered to trade on the National Stock Exchange of India (JAN) amounted to only 31 million (out of a population of 1.4 billion). In the months that followed, even as a new virus disrupted global society, another virus was quietly spreading among the Indian middle classes: an infectious enthusiasm for investing. Within 12 months, the number of investors had expanded by a third to reach 40 million. Today there are over 90 million unique accounts registered on the exchange. An alternative measure, which attempts to measure stock trading accounts nationwide, has nearly tripled between 2019 and 2023, from 41 million to 140 million. The ingenious 50, JANChina's benchmark index routinely hits all-time highs, most recently on March 7.

The rush of retail equity investors represents a sea change in the saving culture of the Indian middle class. Indians have long invested their money in low-risk, low-return assets, primarily gold, which at almost 16% accounted for the largest share of household wealth in 2023 after property at 51% (see graphic). Bank deposits and insurance funds together accounted for another 20%. Equities (owned directly or through funds) still represent a small slice of the pie, but one that is growing rapidly: from 2.2% in 2013 to 4.7% a decade later. By comparison, Americans have 40% of their household assets in stocks.

What explains this dramatic change in behavior? Four factors worked together to make this happen. The first is the impressive digital infrastructure built by India over the last decade or so. Since 2016 there has been a massive expansion in internet access. This has been reinforced by government-backed technology, which reduces the time needed to open bank and business accounts from days to minutes, along with a frictionless digital payments system that allows instant transfers.

The second factor is the pandemic. In India, with no furlough plans or stimulus checks to protect professionals from layoffs and pay cuts, households were forced to take a hard look at their finances and decide how to make their savings go further. Actions were an obvious answer.

Plus, investing apps like Groww and Zerodha made it very easy to sign up and get started. Zerodha, for example, had 1.3 million customers before Covid-19 hit. By the end of 2022, that number was almost 10 million. “The numbers were crazy,” says Karthik Rangappa, the company's education director. "I don't think India has seen this kind of enthusiasm in stocks. [before].”

Third, years of advertising by the mutual fund industry had established the idea in the minds of Indians that stocks were a way to increase wealth. Assets invested in mutual funds tripled between 2009 and 2020; They grew another 33% in the following three years. It was a small step from investing in a mutual fund to experimenting with other products and individual stocks. Finally, the market itself provided plenty of reasons to dive in. The pandemic-induced slowdown proved short-lived. Awesome GDP The numbers and the internal feeling that India's economic rise is unstoppable have added to the euphoria. In January, India's stock market became the fourth largest globally, after its total market capitalization exceeded that of the Hong Kong Stock Exchange.

This worries some market observers. The Securities and Exchange Board of India, the market regulator, is said to have asked asset managers to warn investors about the dangers of investing in less liquid small-cap companies. Analysts worry that many public companies are overvalued. They are also concerned that social media “finfluencers” are creating unrealistic expectations. The number of new market entrants each month is at its highest level ever recorded, surpassing pandemic peaks. Between November and January, 58 million new investors were registered in the JANcompared to 33 million in the same period of the previous year.

For industry experts, the main risk is not just a correction. The thing is, many beginners with no experience in taking losses can be so scarred by the experience that they never return to the stock markets. It would be a much greater loss. ■

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