Uday Kotak, the founder of Kotak Mahindra Bank, in the keynote address he delivered at the SEMI-NSIM Research Conference recently, highlighted a profound transition happening in the Indian capital market. He described the transition from savers to investors as a massive shift, which will have profound consequences. Even though market watchers are aware of this structural shift, only a few have understood the nature and the potential consequences of this megatrend. Let us get the issue in perspective.
The transition from savers to investors has been an evolving process in India. But Covid-19 triggered a structural shift and accelerated the trend dramatically. In April 2020, the total number of demat accounts in India was 4.09 crores. In February this year the number of demat accounts stood at 14.98 crores – an unprecedented explosive growth. The AUM of the mutual fund industry which was Rs 30 trillion in November 2020 grew to Rs 54.54 trillion by February 2024. The year-end SIP AUM has grown from Rs 3.98 trillion in 2020 to Rs 9.96 trillion by 2023.The monthly SIP inflows grew impressively to Rs 19,187 crores in February 2024.
The mutual fund industry’s AUM as a proportion of total bank deposits in the country is significant. Presently, the total AUM of the mutual fund industry, which is Rs 54 trillion, is around 26 percent of the total bank deposits, which stands at Rs 204 trillion. Ten years ago, this was only 10 percent. If we take the aggregate figure comprising of the AUMs of the mutual fund industry, the PMSs and AIFs the amount will be 30 percent of total bank deposits. More important, as Uday Kotak says, this figure can rise to 50 percent in the next ten years.
Clearly, the old model is changing, and the new model is gaining strength. The old model was the ‘saver-borrower model’ where individuals and households deposited their financial savings in banks and businesses borrowed money from banks. The new model is the ‘investor-issuer model’ where companies issue financial securities and investors invest in them.
Why are investors chasing financial securities, particularly stocks? The answer is simple. Returns from stocks have beaten returns from other asset classes impressively in the long run. This trend will continue, and there is an increasing awareness about this.
While investors come to the market chasing superior returns, their participation in the market triggers big changes in the capital market with profound consequences for the macro economy. The transition from the saver-borrower model to the investor-issuer model accelerates capital formation by improving the efficiency of the process. In the saver-borrower model, the banks are the intermediaries and there is a cost in the intermediation process. The investor-issuer model is a disintermediation model. Therefore, if the capital market functions smoothly, the cost of disintermediation is avoided, and capital formation becomes more efficient. This has positive implications for economic growth. To facilitate this transition smoothly, the capital market should function efficiently; excesses should be avoided. The recent frequent messages and warnings from the regulator are initiatives to ensure orderly growth of the capital market.
During a bull market, like the ongoing one, excesses happen. In this age of social media and trading gurus promising quick money, many newbies and gullible investors are being taken for a ride. All the market participants have a responsibility to ensure the healthy growth of the capital market. The transition from the saver-borrower model to the investor-issuer model is good and desirable. But the youngsters entering the market for the first time should understand that there is no shortcut to financial success. Systematic investment and patience are the keys.
