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The Rediff Money Special/ The SEBI-NCAER investor survey

'The majority of investor households are unlikely to make fresh investments in shares'

Part I: '92 per cent of all Indian households are non-investor households'

Investment Distribution

A very small percentage of households savings is channelised into the securities market:

Despite the expansion of the securities market and growth in the number of investor household and in the population of investors, a very small percentage of households savings is channelised into the securities market. This once again highlights the untapped potential of the securities market to channelise household savings.

Investment pattern match the risk perceptions of households:

The urban investor households have a higher proportion of the investments in equity shares, debentures and mutual funds compared to the rural households.

There is a correlation between the income levels and investments of the households in securities market related instruments:

Thus not more than five per cent of the investments of the households in the low and middle income groups are in equity shares, debentures and mutual funds compared to around 12 per cent for the high income groups.

The equity investor households in the higher income group of above Rs 10,000 have around 32 per cent of their investments in equity shares, debentures and mutual funds compared to around 22 per cent for the equity investor households in the low and middle income groups.

Despite their growth the mutual funds have not yet become an attractive investment avenue for the low and middle-income groups:

The mutual funds, including UTI, would therefore need to work out suitable strategies and design schemes which could cater to the needs of these groups of investor households.

Non-Investor Households's Profile

A very large percentage of households have not participated so far in the securities market:

Security market expansion has still not been able to channelise significant proportions of savings into the securities market.

Rural areas have a larger share of non-investors:

The significant majority of the non-investor households are in the rural areas. The percentage of non-investor households in the low-income group is 85 per cent for rural areas and 63 per cent for urban areas.

A bulk of non-investor households have little or no spare money to invest in the securities market:

This is on account of the bulk of the non-investor households belonging to the low and middle-income groups.

Occupation-wise, the heads of most of the non-investor households are wage earners and self employed:

They constitute nearly 77 per cent of the total non-investor households. The education level is low as more than 81 per cent heads of non-investor households heads are non-matriculate or matriculate.

Reasons for not investing in the securities are several:

43 per cent of the non-investor households have cited non-availability of time or money as the first reason for not investing in shares or debentures. Mutual funds, which afford small investors an investment vehicle for stock market investment, could identify this segment of non-investor households as a target for mobilisation of funds.

The class of non-investor households who lack awareness represent potential investor class:

43 per cent of the non-investor households, equivalent to around 60 million households, apparently lack awareness about the stock market. Investor education could impart awareness and education about the procedures of investing in stock markets. This highlights the need for a programme of 'investor education and awareness' and also the necessity for creating infrastructure to facilitate the channelising of their savings into stock markets.

Investment Intentions

The investment intentions of households in the next one year from the completion of the survey (i.e. March 1999) brings out the negative correlation between the risk perception and the choice of investment in these instruments:

The correlation coefficient is of the order of -0.75 per cent for the investor households and -0.67 for all households. The pattern of investment to a large extent conforms to the risk perception of households about different instruments.

Bank fixed deposits continue to appeal the most:

The share of households investing in a specific instrument is an index of their preference for that instrument, then fixed deposits with banks, appears to be the most preferred form of investment. But how long this will endure in the face of declining interest rates remains to be seen. Fixed deposits with NBFCs have been accorded low priority with only three per cent of the households intending to invest in these fixed deposits.

There is likely to be a pronounced shift in favour of mutual funds in general:

From the existing levels, the investment of the households in mutual funds in the next one year is likely to increase, more for UTI than for the other mutual funds. The investment plans of all households for the next one year show only a marginal increase in favour of equity. The distribution of the urban and rural households investing in specific instruments in the next one year broadly follows the all-India trend.

An estimated 6.23 million of urban households and 6.18 million of rural investors are likely to make further investments in the securities market:

An estimated 6.23 million urban households are planning to invest during the next year following the completion of the survey of which about 3.70 million are existing urban investor households and another 2.53 million of the new urban households are likely to invest in the securities market for the first time. About 6.18 million rural investor households are likely to invest in the securities market in this period of which 5.13 million are new rural households.

Despite this increase majority of existing investor households are likely to invest in the securities market:

It is significant that the majority of urban investor households (56 per cent) and rural investor households (72 per cent) are unlikely to make fresh investments in equity shares. This is indeed a matter of concern as it would amount to an expression of lack of confidence by the existing investors on the equity market.

There is an expected diversification of investment with rise in income levels:

Classification of all households planning to invest in the next one year by monthly income levels clearly evidences the expected diversification of investment with level of income. For example, with increasing income levels, a higher proportion of households in at that income level invests in UTI. This is true even for equity investments.

The share of equity investment also increases, both in a urban and rural households as the investible resources increase:

In other words, more households are prepared to take a little more risk with availability of larger investible resources. The distribution of investment by income classes shows that certain instruments are more popular with households at certain monthly income levels. At lower income levels of upto Rs 5,000, fixed deposits are more popular.

Investment in mutual funds and equity become popular at higher income levels, indicating an increase in the risk taking abilities at higher income levels.

Equity Investor Households's Profile

Equity investor households have invested through primary and secondary markets but there are more households investing through the primary market:

Out of the 12.1 million equity investor households, 84 per cent have invested in equity shares through the primary market and 63 per cent have bought equity shares in the secondary market.

The appeal of the secondary market investments seems to be less than the primary market:

Difficulties faced by households in investing through this route such as lack of easy access to the market, inadequacy of market infrastructure, problem in locating the right intermediary for dealing in the secondary market, lack of guidance and advice, are some of the factors which could have inhibited the households, from investing in the secondary market. A comparatively small percentage of rural investor households in the secondary market highlighted the non-availability of infrastructure for the secondary market.

More households have become equity investors after 1991:

Around 80 per cent of the equity investor households were the 'first generation investors.'

Average number of investors per household:

Assigning relative weights to the number of members per household, the average number of individual investors per investor household works out to 1.57 per household.

Performance of portfolio betters at higher income levels:

Equity investor households with higher income have reported better performance of equity investment, probably due to their access to professional advice. Possibly adequate portfolio diversification at higher income levels, would also have helped in improving portfolio performance. Lower income groups cannot afford portfolio diversification and are therefore exposed to unsystematic risk.

Overall experience in terms of returns on investments have been good for a majority of the investor households:

For 75 per cent of the successful equity investor households in the primary markets investments have proved to be gainful. About a third of equity investor households invested in the secondary market between 1995-96, of which 63 per cent have gained from the investment. For only seven per cent the returns were above expectations and for 31 per cent of the investor households, the overall returns have been low. Between eight and nine per cent of the equity investor households reported loss of investment.

Equity investors invest primarily for returns and are aware of the risks in equity investments:

The equity household investors are primarily driven by the consideration of liquidity and returns and are aware that equity investments are risky. Other reasons are: a hedge against inflation, need to hold of asset, safety and stability.

Equity investors hold very small undiversified portfolio:

The majority of the equity investor households hold an undiversified portfolio of relatively small number of companies (only five per cent of the investor households have invested in more than five companies) with value of portfolio being less than Rs 25,000, estimated at the time of the survey. Current market value of investments of only five per cent of urban equity investor households is more than Rs 50,000 compared to 0.45 per cent of the rural equity investor households.

The median value of portfolio for urban equity investor household would lie between Rs 10,000 and Rs 25,000 and for rural equity investor households, less than Rs 10,000. While the proportion of rural households having current value of investments more than Rs 50,000 is almost negligible, there are five per cent of urban investor households which have a portfolio in that range.

Equity investors are by and large long-term investors:

A majority of the equity investor households are long term investors. Only about seven per cent of the urban equity investor households and eight per cent of the urban equity households are very short-term investors whose holding period does not exceed six months.

Investor Awareness

There has been a proliferation in sources of information in the 1990s, especially after 1995:

Over the past decade there has been significant improvement in the quality and availability of information about the securities market. Proliferation of written and audio-visual media has helped in the rapid dissemination of information. Broadly investor households today receive information on the securities market from a wide variety of sources ranging from newspapers and journals to company balance sheets and friends.

Reliance on media for information is more and dependence on balance sheet is less:

Sources of information regarding opportunity for investment are multiple. However, 70 per cent of investor households rely on newspapers and journals. "Friends" form the second important source followed by television. It is important to note that friends are a more important source in rural areas compared to brokers in urban areas. Only about 34 per cent of the investor households obtain information from prospectuses of companies.

Balance sheets provide adequate information:

A large proportion of investor households (62 per cent) is fairly satisfied with the adequacy of information in balance sheets. However, only a majority of the investors (around 18 per cent) indicated that they have a good understanding of balance sheets. This is important from the point of view of framing policies for improving investor education.

Broker related grievances are more:

Analysis of grievances of investors show that the number of broker related problems are higher than issuer related problems. The issuer related problems largely arise on account of physical securities. Rapid dematerialisation will help eliminate the grievances arising from the existence of physical securities.

Unit Owning Households's Profile

A significant majority of the unit owning households has very small investments in mutual funds:

About 60 per cent of the unit owning households have up to 10 per cent of their investments in mutual funds and another 30 per cent have 11 to 25 per cent of their investments in mutual funds.

Majority of unit owning households are in the middle and high income groups.

The income-wise classification of the unit owning households show about six million households or 40 per cent of the unit holding households are in the low income group, another six million households are in the middle income group and three million households or 20 per cent are in the high income group.

Majority of the heads of unit owning households are from the salaried or the self employed class:

In terms of the occupation of the head of the household, nearly 14 million or 93 per cent of the unit owning households fall in the category of salaried, or self-employed or wage-earner class. About one million heads of households who account for about one-sixth of the all retired households are investors in mutual funds. The salaried class account for nearly 42 per cent of the unit owning households are retired.

Higher income groups have larger share of their investments in mutual funds:

Compared with the low income groups, the higher income groups have higher share of investments, signifying that mutual funds have still not become truly the investment vehicle for small investors.

The findings highlight the untapped potential of the mutual funds and the need for the asset management companies to design appropriate schemes to cater to the needs of the small investors and develop infrastructure to reach them.

Money