Is the Indian Investor afraid of investing in the stock markets?

Is the Indian Investor afraid of investing in the stock markets?

RBI'S annual report reveals that proportion of financial savings of the household sector devoted to shares and debentures has slipped sharply to 1.4% of total financial savings in 2003-04 from 7.7% in 1999-2000.

That households have been exhibiting reticence at a time when the markets have been booming sounds strange.

But it does reflect the reality that, unlike the sensex, investor confidence in the markets is nowhere near the peak. Healthy capital markets typically have a large and active individual investor base.

They add to the numbers, leading to better price discovery and serve as a counterweight to large powerful investors such as FIIs who influence the course of the market.

It is not that the reasons for the individual investors unhappiness are not known. Recurrent scams, price volatility, fraudulent company managements and poor corporate governance have all contributed to the diminishing faith of the individual investor in the stock market.

Mutual funds too have not exactly covered themselves with glory individual investors have not moved in huge numbers to their various schemes.

The problem is clearly illustrated in a study conducted by the Society for Capital Market Research & Development. The study found that in year 2002, almost 40% of the investors surveyed listed volatility and price manipulation as their primary concerns.

Interestingly, in the 2001 investor survey, SCMRD found that almost 44% of the investors thought of the stock market as a place where one is likely to lose money.

The survey also considered alternate investment such as mutual funds. It found that mutual funds ranked below direct equity investment even when all schemes, and not just equity schemes, are clubbed together.

Clearly, there is a huge credibility issue that is dogging not only the stock markets but also mutual funds, widely touted as the ideal investment vehicle for a majority of individual investors.

True, over the past few years, there has been considerable progress in reforming the various processes in the markets. However, cumulative retail participation figures indicate that reservations persist.

More needs to be done. The task will be considered accomplished only when investors do not view every rally or bear phase with suspicion.
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