Celebration has been a constant on the Indian stockmarkets for about three years now. But even then June 20 was a special day-the day the BSE's 30-scrip Sensex finally kissed the 7000 mark and then convincingly hugged it the next day. Though Reliance was the final rope on which the Sensex climbed up the historical mark, the journey from 6000 to 7000 was driven by a broad range of stocks-and thankfully so.
What does this mean for the common man who seems increasingly willing and ready to invest in the stockmarkets? Though direct exposure of Indians to equities has been relatively small, at 5 per cent of household savings in 2002-3, the indirect exposure through mutual funds, insurance products and now even pension plans has been growing. There is consensus on Dalal Street that it was money from retail investors that pulled the Sensex up from 6000 to 7000.
The last leg of the rally has come largely on the back of investments made by mutual funds, which are flush with funds of small investors (see graphic). Having collected Rs 10,542 crore in 2005 for equity schemes, mutual funds have already invested Rs 6,352 crore into stocks. Though the break-up of collections from institutional and retail investors is not disclosed, most fund managers agree that the retail contribution has grown significantly this year. Interestingly, the heady surge in share prices has come when foreign institutional investments-key drivers of the rally since 2003-have slackened.
"Domestic retail investors have started to pile into the market again," says Garry Evans, Pan-Asian Equity Strategist, HSBC Global Research. It is indeed a bit surprising that the same investors who had turned jittery and withdrawn from the market fearing another stock scam when the Sensex was nearing the 5000 level are back on the bourses. They are clearly opting for more and more equity investments, but mostly through indirect means. And that's exactly how retail investors should enter the market-through mutual funds. By following this route, small investors leave the complicated decisions of price and timing of buying stocks to professional fund managers.
Funds apart, other routes are being adopted with enthusiasm. About 90 per cent of all the premiums collected by India's largest private-sector insurance company, ICICI Prudential Life Insurance, come from unit-linked insurance plans (ULIPs), which are products that allow policyholders to combine stockmarket investments with insurance. The company has invested nearly Rs 1,400 crore (one-third of the total assets under its management) in stocks. Most insurance companies maintain at least one-tenth of their corpuses in equities. Earlier this year, the Government allowed private pension funds to invest up to 5 per cent of their corpuses into equities. "There is no doubt that a larger percentage of the population is affected by the equity markets today in an indirect manner due to insurance and pension products. The spread of NSE terminals and broker franchises to small towns shows that even direct exposure has increased," says Puneet Nanda, chief investment officer of ICICI Prudential.
The growth of active DEMAT accounts (now mandatory for stock investing) across the country is proof of the rising equity cult. From a mere 23 lakh accounts in March 2000, there were 65 lakh active accounts as on June 21 this year. The number of accounts surged after the boom in public issues from early 2003 when the government divested its stake in a number of blue-chip PSUs. But it is the growth over the past two months that is rapid. Over two lakh accounts have been opened between March-when the Sensex first came close to breaching the 7000 mark-and June 21. The spread of the NSE to over 300 cities has ensured that the celebrations are not restricted to metros.
Besides the secondary market, retail participation in public issues is also increasing. NTPC received over 14 lakh applications for its IPO last year. Today's IPO investors will be tomorrow's secondary market investors, more so because a rising Sensex means big returns on their investments.
Clearly, wealth creation in India is increasingly relying on the equity markets. Yet we may just be scratching the surface. As Nimesh Kampani, chairman and managing director, JM Morgan Stanley, says, "More Indians are linked to stockmarkets through mutual funds today. But there is a long way to go. Indians' savings in mutual funds amount to just 5 per cent of their bank deposits. The ratio is 1.5 times in the US."
Whether small investors will continue to march into the stockmarkets in future will depend on how smoothly the Sensex goes from 7000 to 8000 and beyond. Or will it go on a downward spiral soon? Experts count India's economic growth, robust domestic demand, the growing army of young wage earners and continually good corporate performance as the reasons that could propel the stockmarkets to newer heights.
Of course, short-term disturbances to the long-term trend, like a bad monsoon or rising global crude prices, can play spoilers. A look at the Sensex journey from 3000 onwards shows that the last leg-6000 to 7000-took the longest and was marked by deep and prolonged corrections. That means investors are marching ahead with caution and calculation. As long as the markets don't deviate from that path, expect the good times to roll.