India's stock market is a global leader already, but much needs to be done to improve its equity investment culture

A decade is a long time. Especially when seen in the light of changes that a sector or segment might see. And here we are envisioning what the Indian stock markets might look like in the next two and a half decades. A tall ask one may say.

However, there are ways to prepare some kind of a crystal ball and use it to peep into the future of India’s stock markets. To begin with, there is a unanimous view amongst market participants that our stock market will be vastly different in 2047 than what it is today. Even in today’s times, our markets are well advanced than many leading ones globally, with some of the best practices already available.

But whether it is about the depth of the markets or the tech tools available for trading or even the products that investors can dabble in, it is perennially a work in progress as the last many decades have proved.

The Indian stock markets have come a long way from the trading ring era when brokers had to shout and use hand gestures in the iconic trading ring at the BSE—which happens to be Asia’s oldest stock exchange—to buy or sell shares.

A technological revolution has ensured that one can trade in shares while sitting conveniently at home, or for that matter, anywhere, as long as there is a smartphone available with data connectivity.

All the tools that an investor needs to decide whether to buy or sell a particular security is today available on the smartphone by way of the trading apps that are offered by all the leading broking firms.

And, these apps are getting more mature with every passing day as they are no longer just a transaction platform but offer much more than that, which only helps the investor to make an informed investment decision.

In a nutshell, all the information that was many years ago shared by a broker, dealer or the relationship manager over the phone moved first to the desktops and now are available on the smartphone with the analytics far more accurate than what it was earlier.

There is no doubt that we have progressed, but as mentioned earlier, it is still essentially a work in progress, and by the time India completes a century of Independence, there would be several paradigm shifts that would be witnessed, putting Indian capital markets on the global map.

Not that it is not there already today, but its place will only be cemented further.

Market participants believe that the coming years should—and most certainly would—see the entry of newer product categories that would, in turn, attract more retail investors to the financial savings arena.

This assumes significance as currently India has a little over 100 million demat accounts, which is a negligible number when seen in the light of the total population of more than 1.4 billion.

Interestingly, many believe that it is like a chicken-and-egg situation. The jury is still out on whether the introduction of more products would attract more investors or whether the influx of investors will lead to the introduction of more products.

But there is no doubt that in the next 25 years, the investor base of the country would have jumped exponentially.

It is much easier said than done though as all stakeholders—the government and capital markets regulator Securities and Exchange Board of India (Sebi), along with all categories of market participants—will have to get some of the basics right as only the right foundation will make the capital markets strong enough to witness the next level of exponential growth.

The number of stock market investors, especially retail, is not just a number for any country. It also reflects the strength of the economy as an increasing quantum of household savings makes its way to the liquid, transparent, formal and well-regulated segment of investing.

Take for example the growth of the investor base in the US between the 1980s and the 2000s as the world’s largest economy attained greater size and nearly half of its population entered the arena of financial investments.

“Patterns rhyme across the globe. As the US went from a $3-trillion to a $10-trillion economy, the participation of investments moved from 3 per cent of the population to 50 per cent. The number of demat accounts went up tremendously,” says Amit Jeswani, Founder, Stallion Asset, a Sebi-registered portfolio management services (PMS) firm. “We expect the same pattern to rhyme in India,” he adds.

Incidentally, the current tally of 100 million demat accounts in India does not mean that 100 million Indians are investing in the stock markets; the number does not reflect the unique number of investors—an individual might have multiple demat accounts across different broking firms. Demat or a dematerialised account is an account required to hold the shares in an electronic format and can be opened through any stockbroker. The two depositories—National Securities Depository Limited (NSDL) and the Central Depository Services Limited (CDSL)—maintain these accounts.

What is to note is that the number of demat accounts is a function of stock market performance as well, which the last couple of years have proved aptly. As the market regulator notes in a recent bulletin: “...incremental additions of demat accounts have been on a declining trend for the past few months... The driving factor behind this declining trend is the market volatility seen on account of various global factors during the current year. Mediocre activity in the IPO market relative to the previous year might also have contributed to this trend.”

Market participants, however, are confident that the number of demat accounts is set for an exponential rise as an increasing number of individuals look at equity ownership. “A realistic estimate for us would be to get to around 30–40 per cent equity ownership level in the next 25 years,” says Gaurav Rastogi, Founder, Kuvera, an online wealth management firm.

Rastogi, however, adds that the jump cannot happen in isolation and there has to be some catalyst in the form of new products and innovations that would attract new investors to the capital markets.

The Indian capital markets have been a trendsetter of sorts in many aspects of trading, including being one of the fastest in terms of settlement of trades—now investors will get shares or funds in their accounts as early as next day of the transaction—and also in certain areas related to risk mitigation and governance.

In terms of product spread, however, market participants believe that there is scope to do more, especially when seen in the light of the bouquet of products available in some of the other leading equity markets across the globe.

Vasanth Kamath, Founder & CEO of Smallcase, a popular investing platform, believes that India can take the game a notch higher by moving to a real-time settlement system that is not available anywhere globally as yet.

“Real-time settlement would reduce market risks, result in cost savings and margins reducing,” he says, adding that in terms of products, Indian policymakers could look at the concept of ‘fractional shares’ and also a unified demat account for all asset classes.

“Fractional shares would help investors achieve diversification at lower investment amounts while improving liquidity and depth that will grow equity culture and retail participation. A unified demat account would result in one account for every individual that will be used for all assets,” says Kamath.

Fractional trading refers to a mechanism wherein an investor can buy a fraction of a share. The concept is already permitted in the US markets and many Indian investors have bought fractional shares of popular companies like Apple, Meta (earlier Facebook) and Alphabet, among others.

Kuvera’s Rastogi also believes that fractional trading, along with tokenised real estate, could be among the key trends that could dominate the Indian markets by 2047 and also attract new investors to the equity markets.

“Fractional trading makes equity ownership completely frictionless by removing lot size and share cost constraints. Similarly, tokenised real estate provides a simple avenue for investors to buy and hold a diversified real estate portfolio at a low entry cost,” says Rastogi.

Incidentally, whenever capital markets are discussed, a bulk of the chatter revolves around the equity segment as it has a direct relation with the average retail investor of the country. However, debt is a huge segment too, especially from a product spread point of view, although it is yet to take off in India from a retail perspective.

“We don’t have a very active debt market in India. That is one thing that can change in a very big way. Moreover, having a deeper options market to hedge long-dated options is important, as options trading can be an effective tool for managing portfolio risk and exposure. The availability of longer-dated options contracts can be particularly beneficial for investors with a long-term investment horizon,” says Stallion Asset’s Jeswani, who also stresses on the point that a deeper options market could be the biggest change in the next 25 years from a risk management point of view.

Another area that is largely estimated to become a major element is algos. “Algos will definitely be more widely adopted by retail investors as a part of their overall portfolio; it will, however, require continued and evolving regulations to ensure safeguards for retail allocation,” says Kamath of Smallcase.

Kamath would know as he is a part of a growing tribe of young and tech-focussed community of market participants that has tonnes of data analytics at its disposal to understand the investor’s mind.

Algorithmic trading—simply called algos in market parlance—refers to automated trading done on the basis of a pre-defined set of parameters using a software code. The orders get executed without any human intervention if the pre-defined parameters are hit.

While algos have cornered a huge market share in many of the more developed equity markets across the globe, such automated trading is fast gaining popularity in India as well, with many participants estimating that in the coming decades, algos would further cement their place in the trading arena.

BSE data, too, shows that the share of non-algo trades has come down to around 26 per cent in December 2022 from as high as around 74 per cent in December 2012. In the US, it is estimated that algos contribute around 80 per cent of the total trading turnover.

Another area of focus in the next 25 years is likely to be that of PMS, as the number of rich individuals in the country grows.

Recent wealth studies have already highlighted the growing tribe of high net-worth individuals, or HNIs, in the country—especially those based in non-metro towns.

According to Jeswani, the total assets under management (AUM) of the PMS industry is expected to grow 20-30 times in the coming two and a half decades, even though it will cover only a small proportion of the population given its minimum ticket size of `50 lakh.

“The total number of discretionary PMS folios in India are just 130,000 and we believe this should be at least 1 million by 2047. The total AUM of discretionary PMS was just `2.65 lakh crore in FY22 even though it has grown six times in the last seven years,” says Jeswani, whose PMS firm had a total AUM of `600 crore as of December 31, 2022.

Meanwhile, the advisory business is seeing a sea change in its landscape. With the help of technology, it is expected to be completely transformed in the coming decades. For instance, robo-advisory has already created a place for itself, though it is believed that the human element can never go out of fashion.

“Technology can be an enabler but the problem in today’s world is that everyone thinks that technology is the solution to all the problems of our lives. It isn’t. Technology is not a magic pill,” says Nithin Kamath, Founder & CEO of Zerodha, which has become the country’s largest broking firm in terms of the number of active clients.

“India needs a professional advisory ecosystem with tens of thousands of advisors. A lot of robo-advisory businesses have not really gone anywhere. People don’t trust a push notification or a mobile app to tell them what to do. People need that trust to be built by talking to people. A human who is dispensing advice can leverage machines but that human-to-human interaction will always be required for people to act on money decisions,” he explains.

Kuvera’s Rastogi, however, believes that the biggest risk for the retail investor is the mis-selling of financial products, and technology can reduce that risk considerably.

“Is it easier to mis-sell a financial product in a one-on-one conversation where the distributor gets a commission or through a large tech-driven platform where everything is scrutinised by the most financially savvy amongst the platform’s user base?” asks Rastogi whose platform has around 1.6 million users.

Interestingly, no deep dive into future trends can be complete without talking about technology and disruption, and the capital markets are no different.

The last decade or so has seen technology disrupt many aspects of the trading and investing arena with discount broking firms snatching away market share from traditional players and investing experience becoming totally seamless.

The coming decades are expected to further ride on the tech bandwagon with trading apps becoming smarter and feature-rich.

“Investing apps do not exist in a vacuum. If we move towards a voice-based interface, investing apps will follow. If we move towards an AR/VR-based interface, investing apps will follow,” says Rastogi.

The markets will certainly evolve and mature as time passes, but as India moves steadily towards its 100 years of independence, one area that requires special attention is that of financial education and literacy and if the concepts of saving, investing and financial planning are introduced at the school level, then the coming decades would definitely see a stronger and more resilient capital market.

“Money and relationships are the two most important determining factors of our life. Concepts related to saving, investing and retirement planning, among other things, should be introduced in school. It will do good for the country if it is introduced early,” says Zerodha’s Kamath.

@ashishrukhaiyar