By ASHUTOSH JOSHI
The Indian government’s effort to attract individuals into the stock market faces a big hurdle: Investors are increasingly disillusioned by investing.
The government plans to launch a program as early as next week to give a tax break to individuals for investing up to 50,000 rupees ($892) in stocks every year.
While that could be a key incentive for individuals, it may not be enough to bring them back in droves. In recent years, retail investors have been put off by the tepid returns and extreme volatility of the market.
Of course, a sharp rebound in share prices could see another rush into the market. But few observers see that anytime soon, so the government’s efforts to stimulate investing will likely be met by a skeptical public for now.
Raja Banerji, a 39-year-old Gurgaon resident, invested in individual stocks for the first time around three years ago when, he says, two brokerage firms promised him returns of 36% and 48% annually.
Mr. Banerji said he would have been happy to get even half of these promised returns. He invested more than 700,000 rupees. Now, his portfolio is worth 150,000 rupees.
“Even if a mad dog bites me, I’m definitely not going back into the stock market,” said Mr. Banerji. He attributes a large part of the loss to excessive trading, including in derivatives, by his brokers.
He has asked his brokers to stop trading on his behalf, but continues to own some stocks, hoping they will recover their value in some years.
The benchmark 30-share Sensitive Index is up a total 10% over the last three years and 7% over the last five years through Tuesday. This translates into an annual return of 4% to 5%, after including dividends paid by listed companies. This compares to an interest rate of 8% to 9% on a typical, much more secure bank fixed deposit. Meanwhile, mutual funds that invest in gold have risen on average by 23% per year over the last three years, according to Value Research.
For many Indians, the first taste of the stock market’s allure came about seven years ago, when, between 2005 and 2007, the market soared in line with markets around the world. Many first-time investors in India bought stocks or stock mutual funds in the hopes of earning double-digit returns.
But a collapse in the global markets in 2008-2009, and more recently a slowdown in India’s economic growth, have hurt returns from stocks.
Daily cash trading volumes, driven largely by individual investors who actively trade in and out of stocks, has fallen sharply over the last three years.
The average daily cash trading volume on the National Stock Exchange in June was 96 billion rupees, versus 219 billion rupees in June 2009.
Flows into equity mutual fund programs, which are primarily owned by individual investors, have ebbed. In the first six months of 2012, investors have withdrawn around 35 billion rupees, versus a net investment of 68 billion rupees in 2011.
Some financial advisers say that investors are even stopping their periodic investments into mutual funds, via systematic investment plans.
“This is mainly because people’s monthly installments for home, other loans have gone up,” said Vishal Dhawan, a financial planner in Mumbai. India’s high lending rates and inflation have been a dampener on people’s savings.
Individuals are increasingly choosing other investment avenues.
“Why should one invest in stock markets, when you get more than 8% tax-free returns from government bonds?” said Chandrashekhar Patwardhan, a 49- year-old resident of Pune.
Mr. Patwardhan has been an active investor in stocks for more than 10 years. This year, he said he has made only a few individual stock bets. The bulk of his investments this year has been in bonds, debentures, and bank deposits, because he believes the future for stocks looks bleak.
“I don’t think (the Sensex) will hit 20,000 level again anytime soon,” he said. On Tuesday, the Sensex closed at 16,918.08 points.
Brokers say it’s important that India’s stock market have more participation from individuals to help reduce overall market volatility. They welcome the government’s new program names after former prime minister Rajiv Gandhi to give an income-tax deduction of 50% on new stock investments of up to 50,000 rupees. The deduction would only be available to individuals who have annual income of less than one million rupees, and investors would have to hold their stocks for at least three years, one official recently told Dow Jones Newswires.
“This is a useful tool for developing the investment culture in the country,” said Dinesh Garg, chairman at Delhi brokerage firm Quest Securities Ltd.