The Great Migration: The Rise of the Retail Investor and the Shift from Traditional Instruments to Capital Markets

Personal finance
1

In recent years, the financial landscape has undergone a transformation, marked by the rise of the retail investor and a notable shift of money from traditional household savings instruments to the capital markets. This phenomenon, often referred to as “The Great Migration”, is reshaping the investment ecosystem, democratising access to financial markets, and altering the dynamics of wealth creation. We glance at:

  • The factors driving this migration,
  • Its implications for the broader economy, and
  • The challenges and opportunities it presents, for both individual investors and financial institutions.

The Evolution of the Retail Investor

Historically, investing in the capital markets was predominantly the domain of institutional investors and the wealthy investors. Retail investors—individuals investing on their own behalf—typically relied on traditional savings instruments such as fixed deposits, savings accounts, and real estate to preserve and grow their wealth. However, a confluence of factors has sparked a shift towards more active participation in the capital markets by retail investors.

1. Access to Technology: The proliferation of technology and the advent of online trading platforms have lowered the barriers to entry for retail investors. Today, individuals can access a wide range of investment options from the comfort of their homes, using user-friendly apps and platforms that provide real-time data, analytics, and trading capabilities.

2. Financial Literacy and Awareness: There has been an increase in financial literacy and awareness, driven by educational initiatives, and the availability of information online. Retail investors are now more informed and confident in making investment decisions, seeking higher returns potential through equities, mutual funds, and other capital market instruments.

3. Pandemic-Induced Market Participation: The COVID-19 pandemic played a crucial role in accelerating the rise of the retail investor. With lockdowns in place and economic uncertainties, many individuals turned to the stock market as a means of maintain financial stability or generating additional income. The market’s initial post-pandemic recovery further fuelled this trend, drawing more retail investors into the fray.

The Shift from Traditional Instruments to Capital Markets

This migration from traditional household savings instruments to capital markets represents a profound change in the way individuals manage and grow their wealth. The capital markets, offering the potential for higher returns, have become increasingly attractive as traditional instruments reduced their appeal.

1. Returns on Traditional Instruments: Fixed deposits, once a staple of household savings, offer returns that do not keep pace with inflation. As a result, the opportunity cost of holding money in such instruments has risen, prompting investors to seek alternative avenues that offer better returns, such as equities, bonds, and mutual funds.

2. Diversification Opportunities: The capital markets provide retail investors with a broader array of investment options, allowing for greater diversification. By spreading investments across various asset classes, sectors, and geographies, investors can manage risk and potentially generate returns.

3. Rise of Mutual Funds and ETFs: Mutual funds and exchange-traded funds (ETFs) have gained popularity among retail investors as they offer professional management, diversification, and liquidity. These instruments have become key vehicles for retail participation in the capital markets, enabling even small investors to access a diversified portfolio of assets.

4. Regulatory Support and Investor Protection: Regulatory bodies have played a pivotal role in fostering a conducive environment for retail investors. Enhanced investor protection measures, improved transparency, and streamlined processes have built confidence among retail investors, encouraging their participation in the capital markets.

Implications of the Great Migration

The migration of money from traditional instruments to capital markets has far-reaching implications for the economy, financial markets, and individual investors.

1. Increased Market Participation: The influx of retail investors has led to increased market participation, contributing to higher liquidity and trading volumes. This has also introduced a new layer of dynamism and fluctuations to the markets, as retail investors often exhibit different trading behaviours compared to institutional investors.

2. Wealth Creation and Economic Growth: By shifting the investments to the capital markets, retail investors are participating more directly in wealth creation and economic growth. This democratisation of finance allows a broader segment of the population to benefit from the potential returns generated by businesses and industries.

Challenges for Retail Investors

Despite the opportunities, retail investors face several challenges, including market fluctuations, the risk of uninformed investment decisions, and potential losses. The democratisation of access does not necessarily equate to democratisation of knowledge, and there is a need for ongoing education and guidance to ensure that retail investors can navigate the complexities of the markets effectively.

Changing Role of Financial Institutions

Financial institutions, including banks and asset management companies, are adapting to the needs of retail investors by offering more tailored products, digital platforms, and advisory services. The rise of the retail investor has also spurred innovation in financial products, catering to the diverse preferences and risk appetites of individual investors.

The key takeaway is that,

The Great Migration of money from traditional household instruments to the capital markets, driven by the rise of the retail investor, marks a significant shift in the financial landscape. This trend reflects broader changes in technology, financial literacy, and economic conditions that are empowering individuals to take a more active role in their financial futures.

Wrapping up,

While the opportunities for wealth creation are immense, so too are the responsibilities that come with increased market participation. For retail investors, financial institutions, and regulators alike, the focus must be on fostering an environment that supports informed decision-making, protects investors, and ensures the continued health and stability of the financial markets. As this migration continues, it is poised to reshape the way individuals invest, save, and build wealth for generations to come.

image

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

1 Like
2

I have a question, Nifty is at all time high - 25,790. Is it time to sell and book profit and do a reverse migration to Fixed Deposits which gives steady return. (the obvious answer would be if the goal is closeby then start selling - I do not have any goal. All I do is just save)

Do investing in Bonds offer returns which - keep pace with inflation?

I was told that many of the promoters are selling part of the stake through block deals and companies coming into IPO on a OFS basis. How come no one tells a retail investor the right time to sell.

Today for the first time, NDTV profit host at the close of market was saying, he did not understand why BSE stock price rose 47% in one month? Icici Bank rose by 5%, he says he cannot remember when such increase happened. The guest was in fact cautioning investors not to enter Icici at these prices. Even the experts are skeptical - I think.

3

People finally starting to understand that money in bank deposits will only go down in value, bank rates dosnt even beat real inflation.

1 Like
4

hybrid funds that has mix of many things is better way to go if someone feels like market at its peak. eg: Coin – Zerodha

5

i investing in multi asset fund now - this is 100% replication American market

RSI and all indicator is crossing 80+

i am feeling like 2008 like crash will be there , but when
when the interest rate high that time also market went up in usa and india , when interest rate going down also market going up - what kind of market is this

6

A trigger will definitely come , somehow from somewhere .History has proved it

7

Yes. I shifted a significant portion to ‘conservative hybrid’ funds… Unfortunately did it much earlier than I would have liked.

1 Like
8

i invested in multi asset fund - its TATA multi its handle very well in 2020 - its capture upside also - steady returns in this fund

9

Are there any Multi Asset ETFs or Hybrid ETFs. Prefer ETFs to Fund.

What is the full name of the fund is it tata multi asset opportunity fund?

10

I was checking the constitutents of SBI Conservative Hybrid Fund.

This invest 73% in Debt + Equity 24% mainly.

The returns since inception is 8%.

My query is
If I invest in Nifty 50 + Fixed deposit in Banks (no TDS) which gives out rate of 8% pa. Wont this be a better option than paying 1.12% as expense ratio by investing in the above fund.

My specific query is
My position is as follows:-
Invested in FD of Bank 100 at 8%. - Steady return with capital protected.
Invested in Nifty 50 ETF - 100 (original capital invested). The value is now 200.

Proposed position.
Investment in FD of bank of 100 at 8% continues.
Sell 50% of Nifty 50 ETF i.e 100 and place it in FD at 8%.

Continue to remain invested in Nifty 50 ETF of 100 K. Hope in another 5 years it doubles and do the above.

Is the above doable or am I doing something wrong.

Note: Fully aware of tax disadvantage and upto 5 Lack is Insured in a Bank.

@Akash_Shah @SG_13 - Yours views will be appreciated as well.

11

that must be regular fund, regular is bad. direct gave 10.5% since inception and after expense ratio(they announce nav after removing expense). and 5yr average is way higher. so ya its better than 5yr lock in fd.

and whenever there is big correction in market, we have option to switch to full equity funds. but we cant do that in tax saving fd.

12

Kotak Debt Hybrid is another conservative hybrid fund I invest in… 10 year CAGR 11.52% in DIRECT mode.

Going DIRECT plan is the way to go, the Regular plan of SBI conservative fund is a mad 1.12%. Nothing ‘conservative’ about that :joy:

1 Like
13

About Multi Asset Allocation, I invest in ICICI Asset Allocator (FOF), which is a conservative fund.
You can also look at Quant Multi Asset Fund and also ICICI Pru Multi Asset Fund which have given good returns but are somewhat aggressive multi asset funds.

1 Like
14

Regarding ETFs, ETFs in India are either based on an Index or bullion (gold & silver).

So we only have Passive ETFs which track a particular index and don’t require any active management except during rebalancing.

And in mutual funds, all funds other than Index funds are considered as actively managed funds (eg: Hybrid fund), so it is not possible to have ETFs that replicate a multi asset or hybrid type fund, as it would require active management.

So for now, ETFs = Index/passive Funds.

1 Like
15

As others pointed out, the expense ratio of SBI conservative hybrid funds seems to be only 0.56% for a direct plan. So not so expensive.

Also, whatever returns a fund generates is post the expense ratio. And in the past 5 years it seems to have generated ~12%.

IMG_20240921_204235
IMG_20240921_2042351071×1283 117 KB

However, this particular fund, although being conservative, certainly seems to be risky, as the ~25% equity allocation seems to be made in risky stocks, as the risk-o-meter shows a HIGH risk, compared to a Moderate risk which is expected for this category (conservative).

Since no one can predict the future and how markets are gonna perform, I will answer this based on the past 5 yrs return data.

If some invested in this fund, they would have made ~12% (5 yr CAGR)

Assuming someone has invested in FD and Nifty50 in the ratio of 75:25

They would have made ~11% (5 yr CAGR)
(8%*0.75) + (19%*0.25)

So it seems like we would have made slightly lesser return, if this DIY strategy was followed in the past 5 year.

Hybrid funds exists to reduce the burden of manually allocating the funds between different asset classes, so why bother replicating it.

Managing investment and asset allocation:

The choice of investment and more importantly the asset allocation is based on several factors, and there is no one size fits all approach.

The factors being, the age, the goal/purpose of investing if any, the return expectations and the risk appetite of the individual.

Now if someone is worried that the market is overpriced and is bound to fall, it is better to park funds in either of the following 3 funds

  1. Pure debt (including FD)
  2. Dynamic or multi asset allocation fund
  3. Conservative hybrid fund

Unfortunately, we can’t predict how the Markets will perform with certainty.

If someone can predict the market movement, and they expect a bearish trend, investing in any fund with equity exposure wouldn’t make sense. They would certainly prefer debt & gold.

i would prefer Dynamic asset allocation fund over a conservative hybrid fund, as this seems to be very flexible, as it can invest 100% equity or 100% debt or any combination thereof as per the market trend. So even if my prediction regarding the market goes wrong, i would still be able to generate decent returns as i leave the asset allocation to the fund manager.

Multi asset funds would probably be a second choice as it includes an additional exposure to a 3rd asset class like gold or real estate, with the minimum exposure to each asset class limited to 10%.

3 Likes
16

Prices are going up like crazy, but everyone knows the risk and alert, so i think market may melt up before melt down, like leaving everyone in fear before going down, see the the upmove came in nifty on 12 sept. Investing in more safer segments now seems only option like in large cap, which will not getting affected so badly. Situations like 2008 can come, i think no way, during times of 2008, there were a very huge euphoria, no one alert, then situations like 2008 happens. Nowadays, everyone is alert, all influencers are also on alert mode.

1 Like
17

see i invest 30% of my portfolio in multi asset fund - one is TATA multi asset opportunity fund - another one is Bajaj multi asset - these two fund is well capture down as well as up
and this fund is not very aggressive -
if you look quant multi asset - in 2020 its fall as much nifty - don’t chase return in mutual fund - now this valuation we need to chase safety on downside - if any upside the fund need to capture - that’s multi asset fund will work

1 Like
18

sdfrwefwef
sdfrwefwef561×854 32.3 KB

55% equity in this fund last month - this fund have commodity arbitrage like calender spread
making steady return , i invested 30L in tis fund happy in down side market

i have lot of fund like high risk like small cap , momentum - but these fund fall big in downside market also

19

@neha1101 I have slightly different take here. You are comparing two investments with different risks. So comparing simply based on returns is not accurate.

As name suggest conservative hybrid is for conservative people. That’s why you see almost 3 quarter is debt and less than a quarter as equity. Off course this will generate less return compared to your investment which is 50:50 equity debt.
But it will also have less volatility and less drawdown. So this is a good replacement for FD or direct bond replacement, but if you are already a balanced investor (ok with 50% equity) you should not be investing in a conservative fund, rather go for Balanced fund.

On paper it is doable, problem comes in execution. Maintaining the desired ratio of debt:equity over a period of time is really painful. Slowly people stops rebalancing and portfolio starts drifting.
Also tax is a real burden, every time you sell, taxes are due. Also FD interest is taxable every year. So you loose out on future compounding every time, you take out money to pay tax. With MF you avoid that problem - as you don’t have to pay tax every time investments within funds are rebalanced or bonds pay out interest.
Also in current scenario, where interest rates are going down, a bond portfolio will generate capital gains, which is not possible with FD.

0.5% is a small fee to pay for to avoid rebalancing hassle that too in tax efficient manner. So while on paper it might look you are generating same return, actually post tax an MF might work out much better.

1 Like
20

Thank you all for your reply @VijayNair @SG_13 @Akash_Shah for your views.

The feeling is just inverse of 2019 - At that time, what to buy as everything was falling.
2024 - What to sell, should I sell,