India was the best performing market last year with the Sensex putting on some 24% in dollar terms as foreign institutions shopped for some $25 billion worth of stocks. But retail investors back home missed the party; data from mutual funds shows that most investors seem to have have cashed out in the rising market—between January and December last year equity schemes saw inflows only in the month of May. It’s not as though they’re punting on their own because retail participation in the markets has stagnated for a long time now — delivery volumes throughout 2012 stayed low at around the R850-crore mark with November seeing a particularly sharp dip to R225 crore.
How disenchanted small investors are with equities and bonds is clear from the fact that investments by households, in shares and debentures, actually contracted by some R6,500 crore in 2011-12 , after increasing by R44,800 crore in 2009-10. While the bulk of household savings, in a country like India, will always flow into into bank deposits, it is unfortunate that investments into bonds and equities can be negative. Some of this has to do with regulation; the ban on entry loads, in August 2009, virtually killed the mutual fund industry leaving agents with little incentive to push these products.
So while the rest of the world rode the rally in the Indian market — the Sensex hit a life-time high in November 2010 — investors at home sat it out giving up a fantastic return of 50% or more for a paltry 2% entry load.
Subsequent efforts by the regulator to try and encourage agents have been at best marginal and met with no success. Also, while insurers did see big collections from ULIPs in the initial years, that came to an end once the usurious commissions were cut. To be sure there was a fair amount of mis-selling, especially in ULIPs and to some extent in mutual funds, but at the end of the day households must be encouraged to put money in equities. While the MF and ULIP pieces need to be fixed, the government could give the markets a leg up by doing away with the capital gains tax on listed securities, currently at 15%.
The government collects some R3,000 crore from this levy which, while not an insignificant amount, isn’t very large either. A zero% short-term capital gains tax could pull investors back