First published in Mint Apr 7, 2014

We have been hearing about how Retail Investors have not been buying equity stocks or Mutual Funds in the past 4-5 years, having reacted adversely to the 2008 stock market crash. Market players like broking companies and AMCs have been waiting for the retail investors to return, and indeed, some of them have been excitedly reporting “green shoots” in the past couple of months. But if a research done by some London Business School (LBS) professors is to be believed, then many of the investors who burnt their fingers in 2008 may never return! The Study at LBS concluded that not only direct loss-facing investors but others, who saw the crash happen from close quarters, get so shocked that it reduces their appetite for risk, sometimes even lasting till a decade later. The Study concludes that in many cases, the “entire set of beliefs and preferences” changes after such shocks.

So, where will Retail Investors now come from ? Well, from hard work !! While some of the old retail investors will return once the equity markets show sustained increase (SENSEX has already increased by more than 25% from its August 2013 low), such investors will vanish again, this time quicker, if there are signs of slow-down or crisis again. Hence, the only way to revive this important customer segment is to re-build this Retail Investor Base. Similar to hiring fresh graduates from campus, training them and making them ready for the world. Only this time, the training should be more comprehensive, the risks well evangelised along with returns. So that the next time the market falls (and fall it will, sometime again), then there should be a more measured flight of such investors from the Asset Class.

So, what are we talking about ? About the more-than-1mn educated people being added to the workforce each year, steadily for the past 15-20 years. Employed across sectors like IT, Retail, Financial Services, Pharma, Engineering, Hospitality. And self-employed professionals like doctors, lawyers, architects and accountants. Younger people with less than five years of experience should be taught importance of Financial Planning and investing in equities through MF SIPs. As experience increases and savings increase, they should be exposed to lumpsum MFs and Portfolio Management Services. As they grow older, the first home having been purchased, and for those who understand individual stocks, direct investments into equities could be introduced. The concept of risk associated with each type of equity investment should be explained at the basic stage. On hearing about the risks, some people will get scared and stay away. Trust me, the Industry is better-off without that segment – it’s a win-win for both in the long run.

Why even stop at MF SIPs, MFs, PMSs and Direct Equities ? As this base grows older, more mature and wealthier, they should understand early-stage-investment products like Private Equity Funds, Venture Capital Funds, Angel Funds as well as standalone investments into any of these opportunities. Those of us who have higher appetite for risk and have higher amount of funds can allocate portion of the portfolio to such products.

One of the ways to evangelise the importance of equities in long-term portfolio building is by explaining the importance of Retirement Planning. Given the advances in medical sciences and hence longevity, nuclearisation of families and absence of Govt pensions, the corpus required for retirement could be mind-boggling for many retail investors. That equities is an asset class which will help meaningfully in building this corpus could be the biggest way to sell equities. The current way of selling equities as a quick way to make easy money has proved to be the bane of the Industry, and needs to be re-visited through the route of Goal Planning and specifically Retirement Planning.

Such a secular and inclusive way of building the Investor base will also iron out the current anomalies of 10% of the investors giving 90% of revenues. The segment of traders, punters, funded broking clients will continue to exist. The intent should be to build a much bigger base of level-headed and aware individual investors who have realistic expectations, so that the high-trading segment ends up forming a smaller portion of the revenue pie, and the Industry doesn’t start writing its own epitaph every time the Fed Reserve Governor sneezes. All this will take time, 10-20 years. And hence, the market players and the Regulator will have to work on this in a concerted fashion. As an old Chinese proverb says, the best time to plant a tree was 20 years ago, and the next best time is now! Further, the current Rs 9.5tn in retail equities and another Rs 2tn in retail equity MFs is hardly an achievement in a nation with Rs 211 tn wealth, and with this overall wealth set to double in the next five years again (refer Karvy Private Wealth’s India Wealth Report 2013). We still have time to re-visit the basics and re-invest in re-building the Retail Investor base for equities. A wonderful & versatile asset class like equities and a wonderfully young & growing nation like India are destined for each other. Only, the introduction has to be done in a proper way.