On a recent Bengaluru trip, the Namma Yatri auto driver who was ferrying us to Cubbon Park turned out to be an avid options trader. Having overheard me talking about mutual funds, he asked if I traded in options. When I said I didn’t, he spent the next 40 minutes of the trip telling me how options trading was really his dream profession and how he hoped to ace it.

He pulled out his phone and showed me screenshots of a cherished trading session in which a Bank Nifty call had zoomed from ₹13 to ₹300. He regretted selling it at ₹150 and grumbled that his day job didn’t give him enough time to trade.

Readers who have been in the markets for some time may interpret this incident in two ways. Some may take this as a sign that the stock market is a bit frothy. Others will shake their heads at the ‘greed’ that is nudging ordinary folk to dabble in Buffett’s ‘weapons of mass destruction’.

But if we try to be a little less judgemental, this could be another manifestation of ‘aspirational India’. Ordinary folks in India are in a hurry to make money, to better their humdrum lives. If this requires them to brave losses and take unconventional shortcuts that their parents feared, they are willing to give it a try.

The impatient investor

There are umpteen illustrations of this. With stock prices soaring, there’s been a manifold rise in stock market activity in the last five years. NSE has seen a 40-fold rise in its monthly turnover between January 2019 and January 2024. But if you thought this is a sign of investors betting on a bright future for the economy and its companies, you’d be wrong.

Almost all of this growth has come, not from the cash market, but from galloping volumes in equity derivatives. Cash transactions in stocks, which are an indicator of serious investor interest, have risen modestly from ₹7-lakh crore to ₹25-lakh crore. But derivative trades are up from about ₹220-lakh crore to ₹8,859-lakh crore. Cash trades in India now account for less than 1 per cent of stock market activity.

Derivative volumes are being driven, not by institutions looking for a hedge, but by retail folk bitten by the F&O (futures and options) bug. A report by Axis Mutual Fund on the ‘Gamification of Indian equities’ in October 2023 noted that while the number of cash investors in India had grown from 30 lakh to 110 lakh in the five years to 2023, the number of active derivative traders vaulted from 5 lakh to over 40 lakh.

Axis posited that retail investors were attracted to derivatives in droves because they could avail of leverage of between 100 and 400 times on options contracts with weekly expiry. The average retail trader held an option contract for just 30 minutes.

This preference for punting rather than buy-and-hold investing, could also explain why so many demat accounts house barely any securities. Though the number of demat accounts has shot up from 3.5 crore to over 14.4 crore in five years, many of them have marginal holdings.

A May 2022 tweet from Zerodha’s founder noted that of the six crore unique demat accounts that were operative, less than half had balances of over ₹10,000.

Many investors seem to take this get-rich-quick approach to their mutual funds too. AMFI data shows that nearly 42 per cent of the retail equity assets with mutual funds in December 2023 had been held for less than two years. This is despite empirical data showing that a five-year holding is essential for equity investors to get to a double-digit return and low odds of losses.

Some folks are impatient with SIPs as well. While the fund industry has been adding SIPs at a furious pace, it has also been grappling with high SIP closure rates. The industry had 6.36 crore operative SIPs in April 2023. In the 10 months to January 2024, it added 3.35 crore new SIPs, but 1.79 crore SIPs were stopped.

Data apart, there’s plenty of anecdotal evidence that Indians of this generation are not keen to wait too long to amass wealth. SEBI (Securities Exchange Board of India) has been unearthing dozens of scams where investors have handed over lakhs of capital and control of their trading/demat accounts to operators who promised to multiply their money using mysterious algorithms.

RBI has been warning folks off illegal forex trading apps. The Centre has slapped eye-watering taxes on real-money online gaming. But rampant speculation through these avenues continues.

Regulatory cues

All this suggests that the regulators may be barking up the wrong tree in trying to protect retail folk from risky products.

Retail investors, even newbie ones, seem to be quite happy to stomach substantial losses (there’s nothing like options trading to inure you to losses), if this offers a shot at larger payoffs.

Therefore, regulatory efforts should perhaps focus on pushing investors away from unregulated products into regulated ones. Ticket sizes for high-risk regulated products like portfolio management services or Alternative Investment Funds need to be brought down.

Efforts can also be made to woo loss-making F&O traders into exploring curated equity portfolios, small and microcap mutual funds and thematic funds. These are risky no doubt, but they have high return potential and decent odds of gains, which may appeal to the F&O brigade.

Of course, all this also raises the question of whether investors who are taking on leverage in F&O, running SIPs and betting on microcap stocks, will stay the course if the quick gains vanish. If a bear market arrives, domestic flows into equities may not prove as patient or resilient as we think.