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The number of individuals owning stocks directly in the Indian stock markets - instead of through mutual funds - is about nine times higher than any other equity market across the globe, said Tarun Ramadorai, Professor at Said Business School, University of Oxford while delivering his keynote address at the India Finance Conference (IFC) organised at Indian Institute of Management-Ahmedabad (IIM-A) on Wednesday.
Quoting data from National Securities Depository Limited (NSDL) - a depository for the equity market in India - obtained for a period between 2004-12, Ramadorai says, "About 10-18 percent of the NSDL equity value is held in individual accounts (excluding beneficial owners), while mutual funds account of 3.5-5 percent of NSDL equity value - MFs are even less important that these numbers suggest because, 60 percent of mutual funds were held by corporations in 2010, and 65 percent of individual stockholders in 2009 owned no mutual funds."
He was however not clear about the reason why individuals preferred to own stocks directly in India.
Speaking on the topic, "Getting Better: Learning to invest in the Indian stock market', at the two-day IFC organised jointly by IIM-A, IIM-Bangalore and IIM-Calcutta, the professor from Oxford University said, that there is, however, an increasing trend towards directing investments through mutual funds.
Tellingly, Ramadorai who analysed 20 million individual accounts from NSDL said rookie investors in India tend to choose "high momentum stocks" unlike investors with 7-8 years of experience. There is also a greater tendency among rookie investors to hang on to stocks that are losing in the market, and selling the stocks that are performing well.
"From the data analysed, the older investor in the Indian stock market tend to get better returns than a rookie investor by avoiding promoter driven stocks, staying away from IPOs, investing in smaller stocks, favouring institutionally owned stocks," says Ramadorai who goes on to state that the older investors in the stock market had churned out returns that are higher than the average returns, while the rookie investors have substantially underperformed in the market.
"If you stick around the market you are going to get better," he says adding that performance of an individual investor improves after spending 5-6 years in the equity market. "This rate of improvement is significantly affected by his own investment experience," Ramadorai added.