Data | Contextualising the rise in retail investments in stock market

Extended bull runs in FY20 and FY21 helped shift asset ownership toward the bourses, albeit, marginally

In June 2022, when Dalal Street witnessed a significant bear-run as stock market indices – Sensex and Nifty – reached their 52-week lows and foreign portfolio investors continued their selling spree, Finance Minister Nirmala Sitharaman dubbed India’s retail investors as ‘shock absorbers.’

In the Data Point published on December 29, 2022, The Hindu explained how retail investors played an important role in counterbalancing foreign outflows. A closer look at asset ownership on a household level shows that while their share in instruments such as mutual funds and equities is rising, it still accounts for only 8% of all households’ total financial assets.

Indian households traditionally held their wealth in physical assets such as real estate and gold. But FY21 saw a dramatic shift towards financial assets. Within financial assets, deposits have always been the preferable instrument. As of FY22, households parked 27% of their assets in deposits followed by provident, pension funds and life insurance funds (chart 1). Investments which include mutual funds and equities comprised 8.9% of their financial assets. Chart 1 shows the share of instruments in total financial assets as of FY22.

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While bank deposits occupy a major share in the ownership mix, their share has undergone a significant decline. From 34.3% in 2018-19, the share of bank deposits in asset ownership came down to 25.5% in 2021-22. Simultaneously, the share of mutual funds and equities in households’ financial asset allocation surged to 8% by FY22 ( chart 2). The chart shows the share of bank deposits, equities and mutual funds in total financial assets.

This shift in asset ownership can be attributed to the bull rally of 2020 and 2021. In the past 10 years, annual returns of BSE Sensex showed bouts of high returns followed by an immediate fall. However, the rally that started in 2020 strengthened in 2021, luring households to move away from deposits. Following weak corporate earnings and trade tensions between the U.S. and China in 2019, bourses rebounded on the back of strong FPI flows and the easing of COVID-induced lockdowns in 2020. The reopening of the economy, and recovery in auto sales boosted Sensex’s gains in 2021.

BSE Sensex delivered 15.6% and 21.7% returns in 2020 and 2021, respectively, while the SBI’s term deposit rates for one year or more hovered around 5%. The deposit rates (as of December 31 for each year) had been on a downward trend since 2019 and by 2021, they touched 5%.  Chart 3 shows annual returns from BSE Sensex and the SBI’s term deposit rates for a duration of one year or more.