TN Set 17191761

SEBI
INVESTOR
SURVEY
2015
Securities and Exchange Board of India

CONTENTS
Chapter 1 01-12 Page No
Introduction 1
1. SEBI Investor Survey 2015 2
2. Key Objectives 4
3. Design Rationale 5
4. BOX I – Estimating total investors in India 6
5. Comparison with the previous investor survey 7
6. Report structure and short summary of chapters 9

Chapter 2 13-23
Indian and Global Economic Backdrop 13
1. The Global Financial crisis and its repercussions 13
2. The Current Indian Economic climate 15
3. Indian Financial markets: Primary drivers 16
4. Indian and Global stock markets : A comparative evaluation 18
5. The Sentiment-Stock market-Real Economy relationship 21

Chapter 3 24-34
Survey Methodology and Sample Selection 24
1. Note on the survey process 25
2. Note on sample design 26
3. Rural Sampling 27
4. Urban Sampling 28
5. Market participants survey 32

Chapter 4 35-52
Urban Households: Investments and Saving Behaviour 35
1. Chapter Rationale 36
2. Introduction 37
3. Investments and Savings: Awareness and Preferences 37
4. The Education-Occupation-Investment Interrelationship 44
5. Savings and Investment Instruments: Household Preferences 46
6. Urban Investment Preferences 48
7. Why Don’t More Households Invest? 51

Chapter 5 53-61
Rural Savers: An Untapped Investor Base 53
2. Introduction 55
3. The (Elusive) Rural Investor 55
4. Potential Rural Investors 59
Chapter 6 62-71
Investor Response to Initial Public Offerings (IPOs) 62
2. Introduction 64
3. Indian IPO Markets 64
4. Interest In IPO amongst Investors 66

Chapter 7 72-80
Mutual Fund: Investor Behaviour and Investment Patterns 72
2. Introduction 73
3. Information Sources 76

Chapter 8 81-90
Investors and Market Participants 81
2. Introduction 82
3. Trading Patterns 83
4. Financial Intermediaries In India 85
5. Interactions With Financial Intermediary 88

Chapter 9 91-102
Household Perception of Financial Markets 91
2. Introduction 93
3. Risk–Returns–Liquidity Perceptions of Investment Instruments 94
4. Household Risk Perceptions and Sentiments 97

Chapter 10 103-110
Awareness of Regulatory Policies, SEBI and Investor Literacy Programs 103
2. Introduction 105
3. Investor Literacy Programs 105
4. Outreach Efforts and Its Success 107
5. Redress Mechanisms for Grievances 109

Chapter 11 111-119
Geographical Analysis of Investor Behaviour and Preferences 111
2. Introduction 112
3. Where are the Investors?: A zonal analysis 113
4. Risk Aversion and Zonal Investment choices 115
5. Does The Education-Investment correlation hold true In every zone? 118
6. A Comparison Between the top-15 and bottom-5 cities 119

Chapter 12 120-138
Market Participants Survey 120
2. Introduction: Financial Intermediaries in India 123
3. A Close Look at the Market Participants’ Industry 125
4. Business of Market Participant 129
LIST OF FIGURES
Page No
Figure 2.1: Global Real GDP Growth Rates and IMF Forecast 14
Figure 2.2: Quarterly Indian Real GDP Growth Rates 16
Figure 2.3: Sectoral Distribution of Indian Economy as a percentage of GDP 17
Figure 2.4: Foreign Portfolio Investments/Foreign Institutional Investments in Indian Equities Market 18
Figure 2.5: Comparative performance of Indian and global stock market Indices 19
Figure 2.6: The Sensex-Real GDP Relationship 22
Figure 2.7: Consumer Confidence and Personal Consumption Expenditure 23
Figure 3.1: Indian States and Survey Responses 24
Figure 3.2: SIS 2015: Urban Coverage 28
Figure 4.1: Awareness Levels of Financial and Investment Instruments 38
Figure 4.2: Household Awareness of Investment Instruments 40
Figure 4.3: Total Household Savings as a Percentage of the Household’s Annual Income 42
Figure 4.4: Total Debt as Percentage of Annual Income 43
Figure 4.5: The Education-Investment Relationship 45
Figure 4.6: Investment and Savings Vehicles Used by Survey Respondents 47
Figure 4.7: Investors’ Investment Preferences 48
Figure 4.8: Why Do Households not Invest in Mutual Funds? 51
Figure 4.9: Why Do Households not invest in Equities? 52
Figure 5.1: Investments in Different Asset Classes amongst Rural Investors 56
Figure 5.2: Instruments for Savings and Capital Formation used by Rural Households 57
Figure 5.3: Awareness of Savings, Investment and Capital Formation Instruments 58
Figure 5.4: Income Distribution of Rural Survey Respondents 60
Figure 5.5: Education Levels amongst Rural Respondents 61
Figure 6.1: Comparative Performances of the S&P BSE IPO Index and S&P BSE Sensex 63
Figure 6.2: IPO Volumes in India since 2003–04 65
Figure 6.3: Difficulties of Investing in IPOs 67
Figure 6.4: Information Sources of IPOs 68
Figure 6.5: Sources of IPO Application Forms 69
Figure 6.6: Part of Prospectus read by IPO Investors 70
Figure 7.1: Assets under Management of the Indian Mutual Fund Industry 74
Figure 7.2: Mutual Fund Investors as a Proportion of Total Respondents 75
Figure 7.3: Information Sources about Mutual Funds 77
Figure 7.4: Mutual Funds Investment Channels 78
Figure 7.5: Part of SID read by Investors 79
Figure 7.6: Grievance Registration amongst Mutual Fund Investors 80
Figure 8.1: Trading Frequency amongst Investors 84
Figure 8.2: Reasons for not Trading Online 87
Figure 8.3: Reasons for Choosing a Financial Intermediary 89
Figure 8.4: Trust Vis-à-vis Investment Decision-Making 90
Figure 9.1: Risk Perceptions of Investments 94
Figure 9.2: Returns Expectations 95
Figure 9.3: Liquidity Perceptions 96
Figure 9.4: The First Word for Risk 98
Figure 9.5: Key Problems with Investing in Stock Markets 99
Figure 9.6: Returns Expectations by Market Capitalization 101
Figure 9.7: Risk Perceptions by Market Capitalization 102
Figure 10.1: Reaching Investors: Sources of Communication from SEBI 108
Figure 10.2: Recourse for Grievances Regarding Financial Markets 110
Figure 11.1: Percentage of Indian Investors by Zone 113
Figure 11.2: Investors as Percentage of Zonal Survey Respondents 114
Figure 11.3: Commodity Futures Demand Map 117
Figure 11.4: The Education-Investment Correlation across Zones 118
Figure 12.1: Market Participants Surveyed across the Country 125
Figure 12.2: Number of Customers Serviced by Different Market Participants 126
Figure 12.3: Geographical Base of Market Participants 127
Figure 12.4: Market Focus (Primary or Secondary) of MPs 128
Figure 12.5: Top-5 Reasons for the Decline in the Market Participants’ Business 129
Figure 12.6: How often MPs Keep Track of Policy and Regulatory Changes 133
Figure 12.7: Methods for Acquisition of New Clients by MPs 134
Figure 12.8: How Often and via What Means do MPs Keep in Touch with their Clients 135
Figure 12.9: Top-5 Reasons for Improvement in the Market Participants’ Business 137
Figure 12.10: How the MPs’ Business has Changed over the Last 5 Years 138
LIST OF TABLES
Page No
Table 3.1: All India State-Level Rural and Urban Listings and Samples 30
Table 3.2: All India City-Level Sample Size Data 31
Table 3.3: Sample target Distribution 32
Table 3.4: Sample selection and Sampling Distribution 33
Table 3.5: Distribution of Actual Sample 34
Table 4.1: List of instruments provided to Survey Respondents 37
Table 4.2: Household Awareness of Investment Instruments 39
Table 4.3: Household Total Debt as Percentage of Annual Income 44
Table 4.4: Investors, by Occupation 46
Table 4.5: Investment Instrument Choice by Income 49
Table 4.6: Education and Investment Instrument Choices 49
Table 4.7: Investors and Investment Instruments used by zone 50
Table 5.1: Total Savings of Household as Percentage of Annual Income 59
Table 6.1: Holding Period of Equities Purchased through the IPO Process 71
Table 7.1: Holding Duration of Mutual Funds 76
Table 8.1: Number of Years Participating in the Securities Markets 83
Table 8.2: Investors’ Market Movements Tracking Frequency 85
Table 9.1: Process used for Risk Mitigation 100
Table 10.1: Source of Information about Financial Literacy Programs 106
Table 10.2: Tabulation of Investors by Participation in Investor Education Programs 107
Table 11.1: Investors and Investment Instruments used by zone 116
Table 12.1: Business Age Distribution for Market Participants 128
Table 12.2: Reasons for Low Participation in Securities Markets 130
Table 12.3: Reasons for Clients to Invest in Securities Markets 131
Table 12.4: Perceived Risk, Return and Time Horizon (1 is Lowest and 5 is Highest) 132
Table 12.5: Information Sources of MPs 136
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October 2016
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FOREWORD
With the progress of the Indian economy, especially unique aspect of SIS 2015 is the inclusion of a Market
when the focus is on the achievement of sustainable Participants’ Survey – a detailed study of the business
development, there has been an ongoing attempt to and behavior of financial intermediaries covering more
include maximum number of participation from all than 1000 brokers, depository participants, agents of
the sections of the society. A host of innovative and mutual funds, sub-brokers and authorized persons.
dedicated measures have been undertaken by the
Government of India to drive forward the financial The global financial crisis and its effect were felt in
inclusion agenda. However, research has shown that India since the last survey (held in 2008-09) and it was
the development of securities markets has a distinctly imperative for policy makers to understand the change
unique effect on the development and growth of an in investor behavior as an effect of it. The detailed main
economy, beyond the role played by the banking sector. survey has been informed by state-of-the-art research
Additionally, securities markets instruments provide in behavioral finance (the overlap of finance and
higher risk adjusted returns and has significant positive psychology) to provide insights into not just the actions
effects on individual portfolios due to diversification. of investors but also their perceptions which lead to
Thus, developing financial markets through high retail action. While some insights received from the surveys
market penetration has both social and individual have been expected, others have been surprising.
benefits, calling out for a financial markets inclusion as However, that is the purpose of these studies – to gain
a narrower but arguably as effective goal as financial the insights and to act upon them. For example, SEBI has
inclusion alone. taken multiple steps to ease the IPO process– an area of
apprehension for some investors in SIS 2015 – validating
SEBI Investor Survey 2015 (SIS 2015) is the fourth in a our efforts in that space.
series of periodic studies conducted or sponsored by SEBI
to quantify actions and perceptions of retail investors. The survey team at SEBI was led by Dr. Sarat Kumar Malik
This iteration of the study has the largest breadth and with support from Mr. Prateek. The team at Nielsen,
depth, covering more than 200,000 households in the headed by Mr. Tathagata Dasgupta along with his
listings exercise and more than 50,000 households in team members, Dr. Akshaya Patro, Mr. Gunjan Rohatgi
the final survey across cities and villages in all states and Mr. Dipyaman Sanyal (Consultant to Nielsen) did
and union territories (except Lakshadweep). Another a commendable job of running such a detailed survey
across every corner of the country and then analyzing to its finalisation. However, the most important players
the data and creating this insightful report. in this entire process are the financial decision makers
in the households who voluntarily spent their time to
Mr. Prashant Saran, Whole Time Member, SEBI and respond to this questionnaire. Without their support
Mr. SV Muralidhar Rao, Executive Director, SEBI have and patience we would not have been able to conduct
provided constant support and encouragement this extremely important survey.
throughout the study. A special word of thanks to Mr.
Sudhakar Khairnar and Ms. Suvidha Nagpal for providing I hope that the findings of the present study will be
assistance to the project. I would like to express useful to SEBI, stakeholders in the securities market,
appreciation to all the members of the committees who policy makers, members of the academia and the
have been associated from the beginning of the project financial sector as a whole.
U.K. Sinha
Chairman, SEBI
01
1
INTRODUCTION
One of the key mandates of securities markets Additionally, smoothly functioning securities markets
regulators1, which extend beyond their supervisory significantly aid economic development and its
function, is to inspire confidence, strengthen consequences go far beyond the positive effects seen
infrastructure and improve participation rates in from an improved banking system alone. According to a
the securities markets2. To widen the reach, bolster recent World Bank policy research paper, “as economies
awareness of the securities markets and to underline its develop, the marginal increase in economic activity
significance in a country’s economic growth, it is vital to associated with an increase in bank development falls,
re-examine the limiting definition of financial inclusion while the marginal boost to economic activity associated
itself, which has so far centred on bank accounts. with an increase in securities market development
Despite the unpredictability commonly associated with rises”4. A number of studies and surveys indicate that
stocks and related instruments in comparison to other a very small proportion of Indian population invests in
methods of savings and capital formation (i.e., real securities market while countries with matured stock
estate, gold, savings accounts, post office savings, etc.), markets have participation rates of around 50 percent5.
risk-adjusted returns from equities tend to outperform To examine, rationalize and potentially bridge this gap,
other asset classes in the long run3. To socialize the gains SEBI Investor Survey 2015 (SIS 2015) attempts to not
from corporate profits and mobilize dormant household only measure investor behaviour and preferences but
savings, the government and government-supported also methodically scrutinize non-participation in the
bodies need to reach out and educate a wider populace security markets.
about options available in the securities markets.
SEBI INVESTOR SURVEY 2015
1.International Organization of Securities Commissions (IOSCO), IOSCO Website: About Us: IOSCO Objectives, last accessed March 20, 2016, https://www.iosco.
org/about/?subsection=about_iosco
2.Securities and Exchange Board of India Act, 1992, last accessed November 16, 2015, http://www.sebi.gov.in/cms/sebi_data/attachdocs/1456380272563.pdf
3.Jeremy J. Siegel, Stocks for the Long Run 5/E: The Definitive Guide to Financial Market Returns & Long-Term Investment Strategies, McGraw- Hill Education, 2014
4.Asli Demirguc-Kunt, Erik Feyen and Ross Levine, “The Evolving Importance of Banks and Securities Markets”, World Bank, 2011, last accessed November 16,
2015, http://siteresources.worldbank.org/EXTFINANCIALSECTOR/Resources/Banks_and_SecuritiesWP5805.pdf
5. See similar surveys conducted by the Hong Kong Stock Exchange (Retail Investor Survey, 2014) or Gallup US Annual Economic and Financial Survey: Stock Mar-
kets (April 2015)
2
SEBI Investor Survey 2015

To develop and regulate the fast growing securities
markets in India, especially following the economic efficient functioning & promoting these markets by
reforms of 1991, the Securities and Exchange Board of providing various investible instruments to the existing
India Act, 1992, established the Securities and Exchange as well as potential investors.
Board of India (SEBI) on April 12 of that year. Through

comprehensive monitoring, supervision, and policy SEBI Investor Survey (SIS) 2015, conducted by Nielsen
development, SEBI continued to showcase its keenness India Pvt. Ltd., is the fourth iteration of a periodic SEBI-
to promote and develop the Indian securities markets sponsored investor survey, which primarily focuses
and protect investors’ interest. The primary mandate on research questions most critical to policy makers.
of SEBI according to its preamble is, “...to protect the The survey was developed to identify and understand
interests of investors in securities and to promote investor perceptions regarding investment choices
the development of, and to regulate the securities and savings instruments and to probe further into the
market”6. Since risk-adjusted returns from equities decision-making processes of non-investors, particularly
tend to outperform other asset classes in the long run, by attempting to understand their non-participation
participation in securities markets is imperative not only in market instruments and their approaches to saving.
for the development of the economy as a whole but In addition to a broader coverage in the survey’s
also to socialize the gains from corporate profits. Jeremy geographic scope and a substantially larger sample
Siegel’s seminal text on the subject of long- term, risk- size than the previous survey, SIS 2015 also provides a
adjusted returns of equities markets uses data from robust estimation of investors in the country. Although
the United States (US) to prove that stocks have the the sample is right- skewed in income to capture more
highest risk-adjusted returns due to the mean reverting investors, no areas (urban or rural) were dropped
properties of equities returns7. In a cross-sectional study following the listings exercise in order to avoid a bias
of emerging markets, Spierdijk and Umar (2014) also in the estimates of key variables like total investor
find that domestic investors benefit from stock markets households or securities markets participation rate.
in the long run8.
Thus, an equally important mandate of SEBI is to ensure
6. Securities and Exchange Board of India Act, 1992, last accessed December 20, 2016, http://www.sebi.gov.in/cms/sebi_data/attachdocs/1456380272563.pdf,
7. Jeremy J. Siegel, Stocks for the Long Run 5/E: The Definitive Guide to Financial Market Returns & Long-Term Investment Strategies, McGraw-Hill Education, 2014
8. Laura Spierdijk and Zaghum Umar, “Stocks for the Long Run? Evidence from Emerging Markets”, Journal of International Money and Finance, Vol. 47, October
2014, pp. 217–238
3
Since the data requires a significant number of penetration and online trading, lower volumes in some
investors to create rigorous analyses and estimates, it businesses and larger institutional players entering the
was recognized that random sampling would not be market, market participants’ businesses have undergone
effective for this investor-focused survey. However, it a sea change in the last five years. SIS 2015 is arguably
was also apparent that ignoring certain States or socio- the sole attempt to rationalize the perceptions and
economic groups would lead to a statistical bias, and the sentiments of the many participants in this fast- evolving
sample would not then be a true visual of the broader market.
population. The methodology is unique and is one of the
key strengths of this survey. While details of the sampling SIS 2015, while focusing on securities markets, is
techniques are provided in Chapter 3, the breadth of the primarily a survey of retail consumers of investment
survey (with over 50,000 responses across all States and instruments. Thus, the securities markets expertise of
Union Territories except Lakshadweep), its additional SEBI and the consumer focus of Nielsen have formed a
focus on rural respondents (1/3rd of the sample) and the unique and valuable partnership to help create not only
depth of the questionnaire (from perceptions on risk, a deeper understanding of the choices and the psyche
returns, and liquidity to actual investment behaviour; of the Indian investor but also of the potential investors
from risk mitigating strategies to demographic details) who can but choose not to participate in the markets.
makes this survey distinctive – even in the global arena . 9
Another key element of the report is a detailed survey

of market participants, including Depository Participants
(DP), Mutual Fund Agents (MFA), Brokers, Authorized
Persons (AP) and Sub-Brokers (SB). With falling
commissions and tightening margins, higher Internet
9. See similar surveys conducted by the Hong Kong Stock Exchange (Retail Investor Survey, 2014) or Gallup US Annual Economic and Financial Survey: Stock
Markets (April 2015)
4
Key Objectives
The list below highlights the aspects that are more objectives that underline the SIS’s questionnaire design
crucial from a policy design perspective and the key rationale and framework, the survey methodology and
the comprehensive analysis:
Household Investors
• To understand the socio-economic characteristics of households
• To study the financial savings/investment behaviour of households
• To determine the risk profile of investors and relate it to their investment behaviour
• To estimate the concentration and distribution of household investors in the securities market
• To find out the reasons for non-investment in securities market and also response to equity public issues
• To understand the interface between investors and market participants and the impact of regulatory policies
• To find out the impact of investor education/financial literacy programs on investments, investor grievances and
awareness of redressal mechanisms
• To compare the results of the previous survey with the current survey to find out changes in the investor
population (growth/decline), investment behaviour/patterns, etc.
Survey of Market Participants

• To understand market participants’ responses to dynamic market situations, their perspective on investor
awareness and behaviour, penetration of securities market, business environment, views on regulatory aspects,
etc.

5
Design Rationale
While a sizeable portion of the report is designed to these biases and thus, subsequent steps are taken to
collect socio-economic, demographic and investment educate investors in these areas, perceived risks have
data, the survey questionnaire’s rationale and structure been analysed in detail. Apart from simply quantifying
is grounded on the tenets of behavioural finance, investor choices, the survey’s objective is to understand
a field that enmeshes psychology with traditional exactly what underlies the difference between those
efficient market economic theory. An overlap between who do and those who do not invest and additionally,
traditional finance and investor psychology, which to underline and rationalize survey outcomes that
is used in both academic and practitioner finance, showcase the anomaly between the perceived risk of an
behavioural finance recognizes that investor sentiment instrument and its actual risk.
is fraught with heuristics (mental shortcuts) and biases.
While conventional financial models expect unbounded The SIS report uses data collected from the extensive
rationality in investor conduct, behavioural finance survey, from multiple economic data sources, and
acknowledges that human rationality is constrained additionally, also makes use of a variety of related
by the cognitive inadequacies of the brain10. With academic research to ascertain causal relationships
reference to the current survey, it is crucial to keep in between respondent characteristics and their investment
mind that investors may possibly be biased against choices and risk perceptions. Data visualization tools
certain instruments due to their higher perceived (like maps, graphs and plots) and statistical analysis
risks and on the other hand, may be more tolerant of (like correlations, chi-squares and cross-tabulations) are
other instruments simply grounded on random name utilized throughout the report to generate insights from
recognition. To make certain that the outreach programs the rich dataset collected by the Nielsen team from all
of government organizations and SEBI are cognizant of 29 States, 5 Union Territories and the National Capital
Region.
10. Andrei Shleifer, Inefficient Markets: An Introduction to Behavioral Finance, Clarendon Lecture Series, Oxford University Press, 2000
6
Box I – Estimating Total Investors in India
SEBI Investor Survey 2015 (SIS 2015) attempts to generate a deep understanding of retail investors and to also gain
insight into why so many of those households who can potentially invest in the securities markets, do not. To
support this key objective, a random sample would obviously not provide the desired investor and non-investor
mix. Thus, the initial listings sample and the final survey sample use a detailed and unique targeted sampling
process, which is skewed towards localities with a higher number of demat accounts. This ensures that the
survey’s sampling technique is exclusive and directed at generating accurate insights. Consequently, incomes in
the listings exercise are, on an average, three times the city average and this survey cannot be compared to either
earlier investor surveys or with other surveys that use random samples.
As a first step in the SIS data collection effort, a set of 2,04,694 households were listed and basic information
about demographics, income, savings and investments were collected. In the second step, a subset of 50,453
amongst these listed households were chosen to conduct the final survey. In light of the statistical law of
large numbers, the listings data was used to create an estimate of the total number of investing households in
India at the end of the 2015. Using a bootstrapping methodology to project the total investor households using
distinct projection values for rural and urban surveys, by state, it was estimated that there were a total of 3.37
crore investor households in India. Of these, 70 percent (2.37 crore) reside in urban areas while the other 1 crore
were rural households. Among these, mutual funds were the most popular investment instrument and nearly
66 percent (or 2.2 crore households) were investors. There were an estimated 1.9 crore households which
invested in equities and 77 lakh households which invested in bonds (public, private and PSU). Among derivative
instruments, there were 30 lakh equity and currency derivatives investors and 21 lakh investors in commodity
futures. Amongst the equity investors, about 18 percent (or 33 lakh) had invested in the primary (IPO) markets.
It is obvious that since the last survey was conducted in 2008-09, the effects of the financial crisis have been felt
in India and many investors opted to leave the markets in the height of the crisis. However, with a rise in consumer
confidence, investor expectations and the indices, the retail investor has returned with percentage figures reaching
back to levels seen in the last survey. This is also supported by the SIS data, which observes that 50 percent of the
securities markets investors have started investing in the last five years. Additionally, due to a rise in the number
of households, the total number of investing household has increased significantly.
7
While these estimates can throw some light upon the total number of investors, these are approximations from
a survey, which uses targeted sampling (essential for the purposes of this survey, as mentioned above) and thus,
cannot be considered a perfect representation of ground realities. To answer that question and quantify the exact
number of investors in India, SEBI is undertaking a large scale de-duplication of demat accounts and mutual
fund folios across depositories, linking these accounts back to the unique PAN numbers of investors. This will
allow for a definitive and complete investor count. However, an estimate is also being provided here to provide an
indication of the breadth and trends in investing.
Comparison with the Previous Investor Survey

In 2011, the NCAER published the Investor Survey for was broader by design and more comprehensive than
SEBI, which was conducted in 2008-09. This section the previous survey. It was meant to encompass a vast
compiles some key results from that survey, contrasts array of investor behaviour and actions (as enumerated
those with the findings of the current survey and above) and additionally include:
additionally, highlights the crucial differences between
the two in terms of survey, sample and motivation. While Reasons for non-investment in securities markets.
a number of key findings are similar between the 2011
Understanding the interface between investors and
and 2015 surveys, there are some crucial differences in
market participants.
investment awareness and behaviour. Using the 2011
survey as a point of reference, the current survey’s
Finding out the impact of investor education/
questionnaire and sampling frame have been redesigned
financial literacy programs on investments, investor
to account for broader objectives that are essential to
grievances and awareness of redressal mechanisms.
regulators and policy makers. The objective of SIS 2015

8
The previous investor survey sampled 38, 412 households Details are provided in Chapter 3 of this survey report.
from 44 cities and 40 villages. The survey encompassed While the previous survey had listed 70,159 households
25 States/Union Territories (UTs) and did not include as the sampling population, the SIS 2015 has a listing of
Jammu & Kashmir, Arunachal Pradesh, Nagaland, Manipur, 2,04,694 households from across the country. This allows
Mizoram, Tripura, Andaman & Nicobar Islands, Daman for a broader pool of survey participants to choose from.
and Diu, Dadra and Nagar Haveli and Lakshadweep.
In both the earlier and SIS 2015 surveys, there is a vast
In comparison, the SIS 2015 includes all States and regional disparity in the proclivity to invest in securities
Union Territories of India except Lakshadweep and markets. For instance, in the previous survey, 55 percent
has a total sample size of 50,453. SIS 2015 covers of investors were from the West zone while in the current
488 villages and 74 towns and cities. This has created survey, 51 percent of investors are from the West.
a more holistic view of the country’s investors
and also allows for a significantly more robust According to the previous survey, the estimated number
estimation of the number of investing households. of investor households in India was 2.45 crore (about
11 percent of total households). That implied that 92.7
To help understand and analyse the broader objectives lakh households (or 6 percent) in rural India invest in
of SIS 2015, the survey methodology used in the the securities markets. The 2011 survey stated that, “…
current survey was distinct from the previous study after repeated listing in more than 50 villages across the
(and is unique amongst such studies). SIS 2015 uses country, it was found that the extent of participation
a purposive sampling technique based on demat in securities markets was extremely low. Hence it was
account data. The objective of using such data is to decided to present the findings of investments and
increase the incidence of selecting investors in the savings separately for rural households based on a
total population to get a comprehensive view of their carefully selected sample of 40 villages”. In contrast,
characteristics, behaviour and investment patterns. the SIS 2015 data uses a pan-India survey of large
The previous study used a focused sampling for the rural sample for analysis and estimation. Probability
listings exercise by selecting blocks within cities/ Proportional to Size (PPS) sampling methodology has
towns and then used a stratified sampling technique been used for the rural sampling in the current survey
by creating bands of ‘investors’, ‘savers’ and ‘none’ to and the villages covered during the survey have not
choose households accordingly for the final survey. been restricted to those that have a close proximity to

9
urban clusters. To get a true representation of the rural “26 percent of HH (households) with 15 years of
population, most of the selected villages are far from cities educations in NCAER invest in secondary markets”.
Though, as stated earlier, the estimated number of The SIS 2015 data found analogous results with
households may not be comparable across the two 25 percent of the highest educated group (15+
surveys but at a broad level, the estimated number of years of education) invested in securities markets.
investor households in India as per SIS 2015 are 3.37
crore (2.36 crore urban and 100.3 lakh rural households) In 2011, the preferred mode of investments was
as compared to 2.45 crore (1.52 crore urban and 92.7 mutual funds, followed closely by equities. This
lakh rural households) estimated in the previous survey. pattern still holds true with very few investors
engaging in bonds or derivatives in either survey.
There are multiple areas where the 2015 survey Additionally, the dependence on traditional media like
findings closely align with the 2011 findings. The newspapers and the importance of financial intermediaries
most important amongst these is the education- has remained consistent despite rising Internet
investment relationship. According to the 2011 survey, penetration and changes in the brokerage industry.
“Education plays a significant role in influencing risk
preferences. The risk appetite was the highest among However, SEBI website, which was not often
investors with more than 15 years of schooling” and visited by investors (according to the 2011 survey)
is now a key source of information for investors.
Report Structure and Short Summary of Chapters

• Chapter 2 (Indian and Global Economic Backdrop) well as several wide-ranging external influences.
analyses both local and global external events To analyse and rationalize investor sentiment, it is
and their potential implications on investment essential to study the market environment (with a
and savings behaviour. Investor sentiments are special focus on stock markets), economic growth,
inextricably linked to and affected by internal factors, the condition of businesses, the Indian political and
like income, age, occupation, and risk tolerance as social situation as well as the global market place
scenario.

10
• Chapter 3 (Survey Methodology and Sample specifically, the survey probes further to gauge the
Selection) provides details on the survey essential ethos of an investor. To help rationalize
methodology and sampling techniques. Between the central questions that this survey attempts to
September and November 2015, SEBI Investor answer, the urban investors’ responses are analysed
Survey encompassed a total of 50,453 households in detail.
across virtually every corner of rural and urban
India, the seventh largest country in the world • Chapter 5 (Rural Savers: An Untapped Investor Base)
with an area of 32.9 lakh square kilometres and a is a key chapter for policy makers as it provides
population of 125 crore. The SIS 2015 includes all 29 information and analysis of the rural saver and
States, 5 Union Territories (excluding Lakshadweep) investor and discusses the key roadblocks that
and the National Capital Region of Delhi. This is the hamper investment in these markets. Despite the fast
first time that a survey of this depth and magnitude urbanization in the country, 65 percent of the Indian
has been undertaken in all the North Eastern States population lives in villages and yet, investments in
of India. This chapter details not just the exact market instruments are still relatively rare in these
processes involved in covering this vast country and rural markets. Rural respondents constitute nearly
its population but also the methodology utilized to 1/3rd of the SIS 2015 sample.
procure a representative sampling of the diverse
population. • Chapter 6 (Investor Response to Initial Public
Offerings) details one of the key areas of interest
• Chapter 4 (Urban Households: Investments and not only for SEBI but also for securities markets in
Savings Behaviour) is the survey’s core, which general: the response to new public issues – either,
endeavours to identify and characterize the Indian Initial Public Offerings (IPO) of equities or New Fund
urban investor – the majority of Indian investors. Offerings (NFO) of mutual funds. Since primary
The primary focus of the analysis is to identify markets are the key to liquidity for corporations
the fundamental choices of investors and their and a well-functioning primary market provides
awareness concerning various investment and the grease for a smooth functioning economy, this
savings vehicles, financial instruments, investments chapter is grounded on the survey participants’
patterns, household savings and debt; more detailed answers concerning their experiences while
applying for new issues.

11
• Chapter 7 (Mutual Funds: Investor Behaviour and the securities markets. A decrease in prejudiced risk
Investment Patterns) studies investor behaviour and aversion will certainly increase participation and
key developments in the mutual fund (MF) industry. this, in turn, will enhance liquidity and the possibility
Due to the ease of investing in mutual funds through of productively utilizing the money ‘trapped’ in non-
SIPs (Systematic Investment Plan) along with its investment vehicles (like gold, precious metals,
diversification benefits, most investors prefer this unused land etc.).
instrument to equities or bonds. Additionally, the
publicity of SIPs and the MF industry over the past • Chapter 10 (Awareness of Regulatory Policies,
ten years has seen an enormous increase in total SEBI and Investor Literacy Programs) focuses on
Assets under Management (AUM) of MFs. awareness levels of regulatory policies, the various
investor literacy programs and specifically, on SEBI’s
• Chapter 8 (Investors and Market Participants) role in the investor community. This analysis not only
introduces the various Indian market participants provides policy makers with a metric to measure the
and focuses particularly on the broker-investor success of past programs but also helps in creating a
relationship. The survey finds that although online road map for potential outreach planning.
trading and investments is gaining popularity,
brokers and market participants continue to be • Chapter 11 (Geographic Snapshots of Investor
the mainstay of the securities market functions. Behaviour) slices, dices and analyzes the SIS 2015
The investor-broker interdependence, especially data by geographic areas. From regional zones to
the particularities of the changing structure of the sets of large cities and states, this chapter covers
brokerage business, is discussed in depth. the disparities in patterns and behavior across
geographies to rationalize and understand why
• Chapter 9 (Household Perceptions of Financial some of the wealthier and higher educated groups
Markets) analyses investors’ perceptions vis-à- do not participate in the securities markets.
vis specific investment instruments. The survey
reasons that a comparison of perceived and actual • Chapter 12 (Market Participants’ Survey) is a
risk metrics and especially, the need to bridge separate survey on market participants (financial
the fissures between the two, may help provide intermediaries) that received 1,016 completed
guidelines to encourage more participants to enter questionnaires from brokers, sub-brokers,

12
depository participants and authorized persons their feedback on policies and taxes. This chapter
across the country. This is an extremely valuable also allows a comparison between the supply side
resource that helps assess particular market (the intermediaries) and the demand side (the
participants, the condition of that business, their investors) and clarifies their differing stances on
perception and take on investor sentiments and also similar questions regarding investment behaviour
and perceptions.

02 ECONOMIC BACKDROP
13
INDIAN AND GLOBAL
Investor sentiments are not engendered in isolation. between September and November 2015, whereas the
They are inextricably linked to and affected by both survey’s last iteration took place in 2008–09 (published
internal factors, like income, age, occupation, and in 2011). In the interim five to six years, the stock
risk tolerance as well as several wide-ranging external markets, the condition of the economy, the political
factors. To analyse and rationalize investor behaviour scenario and the confidence in securities market
and sentiment, it is essential to conduct a detailed study amongst the population have altered considerably. To
of the business environment (with a special focus on provide a substantial backdrop that accurately senses
stock markets), economic growth, the Indian political the nation’s pulse, the survey needs to scrupulously
and social conditions as well as the global market place consider the potential implications of various external
scenario. The SIS 2015 household survey transpired factors on investment and savings.
The Global Financial Crisis and its Repercussions

The US economy (the largest economy of the world and Quantitative Easing (QE) have been essential to
and the centre of global consumption) is now out of counter the effects of the low growth-low confidence-
the turmoil observed during and in the aftermath of low inflation-high unemployment cycle in the GFC’s
the 2008 Global Financial Crisis (GFC). For the first wake. These measures created large-scale liquidity in
time in nearly a decade since the financial turmoil, the market and eased the credit flowing into the real
the US Federal Reserve Bank (Fed) raised its interest economy11. As an effect of these policies, unemployment
rates on 15th December, 2015, to avoid the risk of rates in the US are now stabilizing at 5 percent (from a
potentially overheating the economy. The US and other peak of 10 percent in October 2009)12.
developed markets’ Zero Interest Rates Policy (ZIRP)
11. International Organization of Securities Commissions (IOSCO) Research Department, “Securities Markets Risk Outlook, 2016”, IOSCO, last accessed March 3,
2016, https://www.iosco.org/library/pubdocs/pdf/IOSCOPD527.pdf
12. Bureau of Labor Statistics, “Unemployment Rate”, Labor Force Statistics from the Current Population Survey, last accessed January 6, 2016,
14
Nonetheless, the recovery from the GFC is far more then rebounded sharply to 5.4 percent in three years.
muted than the sharp upturn in the global economy However, during the GFC, global growth rates went
following the last recession of 2000–01 (the dot com down from 5.7 percent in 2007 to -0.009 percent in 2009
bubble and its aftershocks). The global GDP growth and are yet to reach those levels of growth again. The
rate was 4.8 percent in 2000, which then dropped to IMF’s growth expectations13 (as seen in Figure 2.1) show
2.5 percent at the height of the dot-com bubble, and the muted recovery in global growth.
Figure 2.1: Global Real GDP Growth Rates and IMF Forecast
6.0% 5.7%
5.5%
5.4% 5.4%
4.8% 4.9%
5.0%
4.2%
4.0% 3.9% 4.0%
4.0% 3.8% 3.8% 3.9%
3.4% 3.4% 3.4% 3.5%
2.9% 3.1%
3.0%
2.5%
2.0%
1.0%
0.0%
0.0%
-1.0%
Source: IMF, The Yellow Bars indicates forecast and projections while amber indicate real values.
While it is indisputable that the global economy has coming year, to sustainably reinvigorate their post-GFC
a significant effect on the Indian economy and that development paths, growth in emerging markets (EM)
the country’s development agenda may receive some has to primarily originate from within and not without
support from global economies in the current and the economy14. Factors like internal consumption and
13. International Monetary Fund, “Gross Domestic Product, Constant Prices, World”, World Economic Outlook Database March 2015, last accessed 22 November,
2015, http://www.imf.org/external/pubs/ft/weo/2015/02/weodata/weorept.aspx?pr.x=33&pr.y=9&sy=2000&ey=2020&scsm=1&ssd=1&sort=country&d
s=.&br=1&c=001&s=NGDP_RPCH&grp=1&a=1
14. United Nations Economic and Social Commission for Asia Pacific, Reinvigorate Domestic Demand to Revive Growth & Support Sustainable Development,
UNESCAP, January 14, 2016, last accessed March 15, 2016, http://www.unescap.org/op-ed/reinvigorate-domestic-demand-revive- growth-support-sustainable-
development
15
domestic retail investments are major drivers that spur studies16. The wealth effect from securities markets
real economic growth. At the same time, consumption affects consumption and domestic demand and that, in
and investments are vastly dependent on both the turn, supports a stable economic growth.Consequently,
securities markets and investor sentiments. This is SIS 2015 attempts to identify and understand investor
commonly known as the “wealth effect” 15 of stock behaviour and perceptions regarding investment choices
markets, which is not only seen in developed markets like and savings instruments in order to probe further into the
the US but recent research has also found a significant decision-making processes of non-investors, especially
wealth effect in cross-country emerging market by attempting to understand their non- participation in
market instruments and their approaches to saving.
The Current Indian Economic Climate

India is now (December 2015) the fastest growing large in the global economy. However, it is far from the heady
economy in the world. The year-over-year quarterly real continuous high growth rates seen between mid 2004
GDP growth rate is at 7 percent, indicating a moderate to mid-2009. India’s burgeoning middle class17, a robust
recovery in a shaky global economy (Figure 2.2). consumption expenditure growth (see Figure 2.7), the
Subsequent to the rapid decline of growth rates during proposed policy changes and infrastructural investment
the GFC, the economy recovered in 2010–11, only to plans from the government18 should help it to remain
suffer some setbacks from mid-2012 to mid-2014. Over one of the fastest growing global economies in the near
the past year, economic growth has again started gaining future, attracting significant investments from yield-
some teeth, especially in comparison to the slow growth focused investors across the globe.
15. James M. Poterba, “Stock Market Wealth and Consumption”, The Journal of Economic Perspectives, Vol. 14, No. 2, Spring 2000, pp. 99–118
16. Tuomas A. Peltonen, Ricardo M. Sousa, and Isabel S. Vansteenkiste, “Wealth Effects in Emerging Market Economies”, International Review of Economics &
Finance, Vol. 24, October 2012, pp. 155–166
17. Homi J. Kharas, “The Emerging Middle Class in Developing Countries”, OECD Development Center Working Paper No. 285, Global Development Outlook,
OECD, January 2010, last accessed March 15, 2016
https://www.oecd.org/dev/44457738.pdf
18. Key Features of Budget 2016-2017, Government of India, March 2016, last accessed February 23, 2016, http://indiabudget.nic.in/ub2016- 17/bh/bh1.pdf
16
Figure 2.2: Quarterly Indian Real GDP Growth Rates
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
Source: Ministry of Statistics and Programme Implementation (MOSPI)
Indian Financial Markets: Primary Drivers

Urbanization and socio economic growth are two socioeconomic growth) in urban areas tend to invest
interconnected significant drivers, which are expected to significantly more in the markets than those in rural
drive investment growth and an increased penetration areas. 7.1 crore people were added to India’s cities
in securities markets. According to the SIS data (see between 2001 and 2011 and the urban population rose
Chapter 4 and Chapter 5), households with similar from 27.8 percent to 30 percent of the total population.
education and income (the two primary drivers of By 2026, the urban population is expected to increase to
over 50 crore people, which will constitute 38 percent

17
of the total Indian population. In conjunction with this economic growth in emerging markets. According to the
rapid urbanization, the GDP growth rate in India has IMF’s analysis regarding emerging markets19, “Financial
strong sectoral differences, some of which may support development increases a country’s resilience and
the development and growth of stock markets. Figure boosts economic growth. It mobilizes savings, promotes
2.3 corroborates the sectoral evolution in the economy information sharing, improves resource allocation, and
since Independence. The service sector has doubled (as facilitates diversification and management of risk. It
a percentage of GDP) from less than 30 percent of GDP also promotes financial stability to the extent that deep
(constant prices) in 1950-51 to nearly 60 percent in and liquid financial systems with diverse instruments
2013-14. The related concepts of urbanization and help dampen the impact of shocks.” Policy makers and
service sector growth in the economy bode well for governments need to be cognizant of this essential facet
broader participation in the securities markets. This, in in a country’s development paradigm as they create
turn, is an essential component for financial stability and their roadmaps for economic growth.
Figure 2.3: Sectoral Distributions of Indian Economy as a Percentage of GDP
70.0%
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
Agricultural GDP Industrial GDP Service Sector GDP
Source: MOSPI
19. IMF Staff Discussion Note, Rethinking Financial Deepening: Stability and Growth in Emerging Markets, May 2015, last accessed December 2, 2015,
https://www.imf.org/external/pubs/ft/sdn/2015/sdn1508.pdf
18
Indian and Global Stock Markets: A Comparative Evaluation

The Indian equity market has grown in size and value since its 9th March, 2009 lows while the BSE Sensex is up 220
the economic liberalization in 1991. Despite the post- percent in the same time period (as of 31st December,
GFC muted global growth, there has been an increasing 2015). According to data from the National Securities
interest in the stock markets, both from retail investors Depository Limited (NSDL), Foreign Portfolio Investors
looking for yields and companies looking to raise capital. (FPI)/Foreign Institutional Investors (FII) have invested
As the economic slowdown in China has compelled most `7,55,400 crore since 2000–01 and `5,80,983 crore in
global central banks to keep interest rates artificially low, the post-GFC period (since 2009–10), and this number
commodity prices have been plummeting. Thus, yield- increases by about 50 percent when debt is included.
chasing investors (both retail and institutional) have Despite negative growth in 2008–09 at the peak of the
started moving into equity markets (including emerging GFC and in the last fiscal year, the trend line in Figure
economies), fuelling a sharp upturn in the securities 2.4 shows the steady and significant rise in foreign
markets. The S&P 500 is up more than 200 percent since investments.
Figure 2.4: Foreign Portfolio Investments/Foreign Institutional Investments (FII) in

Indian Equities Market (in ` crore)
150,000 140033
110221 110121 111333
100,000
79709
( in ` crore)
53404
48801
50,000 44123 43738
39960
25236
8072
10207
2527
0
2000–01 2003–04 2006–07 2009–10 2012–13 2015–16
-14172
-50,000
-47706
Source: National Securities Depository Limited (NSDL)

19
An analysis of S&P BSE Sensex’s long-term data provides despite the largest global financial crisis and a correction
a persuasive rationale that can help clarify India’s in the current year. Correspondingly, the MSCI Emerging
investment success story (as observed in Figure 2.5), Markets Index (a broad measure of performance for
especially among other emerging economies. The 1991 EM equities) has also moved up 178 percent. On the
financial liberalization and the ensuing development other hand, developed markets like the US or Europe
of an open market-based economy led to widespread have significantly underperformed emerging economies
growth in all sectors of the economy. In fifteen years, during this phase. For example, the US’ Dow Jones
the Sensex increased by 386 percent—from 5,205 in Industrial Average is up 60 percent while the Stocks 50
early January 2000 to 26,117 on December 31st, 2015— Index for Europe is down 31 percent in the same time
period.
Figure 2.5: Comparative Performance of Indian and Global Stock Market Indices
400.0
300.0
200.0
100.0
BSE SENSEX S&P 500 Europe Stoxx 50 iShares MSCI EM ETF
Source: Bloomberg

20
In spite of this documented long-term positive growth, have significantly outperformed India or the EM Indices.
which reflects fundamental economic growth, short- This is primarily due to the effects of the Global Financial
term movements in the equities market are driven by Crisis (GFC) of 2008–10. During this time period, EM
investor sentiments or in Shleifer and Summers’ words: stocks (and economies) did not face the complete rout
“noise traders” (1990). In the long run, arbitrageurs seen by US or European markets. The recent short-term
stabilize market inefficiencies . 20
performance of the Indian markets, which sometimes
tends to have an outsized effect on survey responses
Since this survey was last conducted in 2008–09 due to the salience of immediate events, has been
(published in 2011), the Sensex has moved up more than bleak. The Sensex was down 6.8 percent in 2015, which
44 percent in value (Figure 2.5) while developed markets might have affected the answers of some respondents
of SIS 2015.
20. Andrei Shleifer and Lawrence H. Summers, “The Noise Trader Approach to Finance”, The Journal of Economic Perspectives, Vol. 4, No. 2
(Spring, 1990), pp. 19–33
21
The Sentiment-Stock Market-Real Economy Relationship

Significant component of the SIS 2015 is to collect and movements in stock prices as an indicator of future
analyse data on investor perceptions and sentiments. economic activity and potential labour income growth
To gauge the relationship between stock markets and
21
?” While Otoo eventually concludes that a rise in stock
economic growth, especially whether a growth in stock prices leads to the well-documented “wealth effect”
markets directly translates to a growth in the economy amongst investors, she also finds that people use equity
and to figure out whether sentiments and confidence price movements as a leading indicator of economic and
correspondingly leads to a growth of the markets or wage growth.
the economy, the correlation between a broad equities
market index (in this case, the Sensex) and the real GDP Figure 2.6 establishes that benchmark index Sensex and
growth of the economy is essential. GDP are positively correlated and index performance is
used an indicator to guage the real GDP growth rates.
US Federal Reserve Bank’s Maria Ward Otoo21 attempts This is a global phenomenon that is not limited to the
to answer a more profound chicken-egg question Indian scenario. Stock markets’ performance is also
vis-à-vis the relation between markets and growth. a crucial component in the Conference Board Leading
Her paper’s abstract asks a crucial question: “Does Indicators series22, which is used by economists and
an increase in stock prices raise aggregate sentiment securities markets professionals across the globe.
because people are wealthier or because they use
21. Maria Ward Otoo, Consumer Sentiment and the Stock Market, Board of Governors of the Federal Reserve System, November 1999, last accessed March 16,
2016, https://www.federalreserve.gov/pubs/feds/1999/199960/199960pap.pdf
22. The Conference Board, “Global Business Cycle Indicators”, last accessed March 20, 2016, https://www.conference-board.org/data/bci.cfm
22
Figure 2.6: The Sensex-Real GDP Relationship
12.00% 100.0%
80.0%
10.00%
60.0%
SENSEX Y-o-Y GROWTH RATE

REAL GDP Y-o-Y GROWTH RATE
8.00%
40.0%
6.00% 20.0%
0.0%
4.00%
-20.0%
2.00%
-40.0%
0.00% -60.0%
GDP SENSEX
Source: MOSPI, Bloomberg
Although Figure 2.6 confirms the relationship between According to Figure 2.7, a deteriorating confidence
stock markets (which is often driven by sentiments and in 2012 led to significantly lower growth in personal
expectations) and the real economy, it does not verify consumption expenditure in that year whereas a rise in
the direct effect of sentiments on the real economy. On confidence in 2013 was visible in the actual consumption
the other hand, Figure 2.7 uses data from the Consumer data of the same year. Looking at 2014’s data, it is
Confidence Index series (current and future expectations obvious that since the current and future expectations
series) from the Reserve Bank of India (RBI) Surveys and from the economy are on the rise, the growth rates in
data on growth of personal consumption expenditure of India reflecting this confidence are on the upswing too
Indian households to showcase the effects of sentiment (7 percent in the last quarter).
on actual consumption expenditure.

23
Figure 2.7: Consumer Confidence and Personal Consumption Expenditure
10.0% 140
9.2%
8.9%
8.0%
6.3% 120
6.0%
5.1%
4.9%
4.0%
100
2.0%
0.0% 80
Private Final Consumption Expenditure Growth Current Situation Future Expectation
Source: RBI Consumer Confidence Survey, MOSPI
From King and Levine’s (1993)23 seminal paper to the unmistakably demonstrates that individual psychology
IMF’s 24
recent, extensive research, the relationship (driven habitually by its biases and mental shortcuts)
between the development of financial systems and primarily drives the growth of securities markets25.
its effect on economic growth are gradually becoming Thus, it is imperative for regulators and governments to
recognized by academic researchers and policy makers initiate measures for deepning and broadening of the
across the globe. The vast research on behavioural securities market which will contribute to the economic
economics (for which the psychologist Daniel growth.
Kahneman won the Nobel Memorial Prize in Economics)
23. Robert G. King and Ross Levine, “Finance and Growth: Schumpeter Might Be Right”, Quarterly Journal of Economics, 1993, Vol. 108, Issue 3, pp. 717–737
24. IMF Staff Discussion Note, Rethinking Financial Deepening: Stability and Growth in Emerging Markets, May 2015, last accessed December 20, 2015, https://
www.imf.org/external/pubs/ft/sdn/2015/sdn1508.pdf
25. Daniel Kahneman, Maps Of Bounded Rationality: A Perspective On Intuitive Judgment And Choice, Prize Lecture, December 8, 2002, last accessed December
31, 2015, http://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/2002/kahnemann-lecture.pdf
24
03 SAMPLE SELECTION
SURVEY METHODOLOGY AND
The survey manages to encompass nearly every corner & Kashmir, Arunachal Pradesh, Nagaland, Manipur,
of India, the seventh largest country in the world with Mizoram, Tripura, Andaman & Nicobar Islands, Daman
an area of 32.9 lakh square kilometres and a population and Diu, Dadra and Nagar Haveli and Lakshadweep). All
of 125 crore. Figure 3.1 demonstrates the breadth of 29 states, 5 Union Territories (excluding Lakshadweep)
the SIS 2015. The scale is significantly larger than the and the National Capital Region of Delhi are included in
previous SEBI-sponsored investor survey, which was the SIS 2015 and this is the first time that a survey of
held in 25 States and Union Territories (excluding Jammu this depth and magnitude has been undertaken in all the
North-Eastern states of India.
Figure 3.1: Indian States and Survey Responses
Source: SIS 2015
Darker Shade indicates higher sample size while lighter shade indicates smaller sample sizes.
25
Note on the Survey Process

Grounded on the key objectives of the survey, the and understanding of SEBI regulations related to
SIS 2015 contains two types of questionnaires. The IPOs, mutual funds etc.
operational methodology followed was: • The listing exercise used Paper and Pencil Interviews
(PAPI), whereas the main survey made use of a tablet
• More than 2 lakh (2,04,694) households across urban with Computer Assisted Personal Interviews (CAPI).
and rural India responded to the first questionnaire: It is essential to keep in mind that the survey’s
the households listing exercise. This survey primarily sampling plan is specifically designed to enable
concentrates on demographic and basic household the selection of a larger pool of investors so that
investment information profiles that help create the the sample size is sizeable enough to create robust
foundation list and thus, a survey ‘population’. The estimations of investment patterns and perceptions.
sample is then selected from this population. This survey’s sampling methodology is unique since
it is skewed towards amassing a broader investor
• Over 50, 000 (50,453) Indian households, Including population data. The primary financial decision
36,756 urban and 13,697 rural households, were maker of the household answered the survey
then randomly identified to participate in the questions.
main survey, which subsequently formed the
main survey’s bedrock. It contains comprehensive Executives and consultants at Nielsen in co- ordination
information on household investments, awareness with SEBI have developed both the questionnaires.
of investment options, investments tenures, Subsequent to SEBI’s final approval, the pilot was
expected returns, risk-taking capacity and other initiated. In order to avoid translation losses as much as
such minutiae. Furthermore, to know the investors’ possible, English and Hindi were the primary languages
perception and regulator’s role, the respondents used. However, to ensure easier accessibility that
were asked questions about their level of awreness would help widen the survey‘s scope, the main survey

26
application was made available in multiple languages. demo as well as the main survey sampling from the
listing population was complete. Initially, the survey
SEBI officials provided technical briefings on investment was launched in Northern and Western India and
terminologies and conferred with the field survey subsequently, in Bangalore and the rest of Southern
teams at various locations including Delhi, Mumbai, India. In mid-September, it commenced in Eastern India.
and Bangalore. Following these briefings, the pilot
was conducted in Gurgaon and Jaipur to test the The Market Participants’ survey was separately conducted
flow of questions, the questionnaire application online. A total of 1,016 market participants, such as
on the tablets, the skip patterns as well as the brokers, sub-brokers, mutual funds agents and depository
enumerators’ skill in uploading the data on the server. participants completed the survey questionnaire.
In mid-August, both the tablet-aided main survey
Note on Sample Design

To ensure that data from a sufficient number of investing frame while the third one made use of a sampling frame.
households was captured, a mixed sampling method For the rural sample selection, districts, villages and
was proposed in which certain cities and localities with households formed the first, second and third stages of
higher income levels were given a greater weightage. sampling, respectively. For the urban sample selection,
Similarly, a greater weightage was given to urban cities/towns, urban blocks and households were the
households that were likely to have a higher proportion three stages. Within each state and UT, rural and urban
of investors. Additionally, to achieve a robust estimate sampling was independently carried out.
of the rural population across states, the sample was
spread across rural and urban areas in the ratio of 30:70. Sampling Frame: The rural survey-sampling frame
utilized the 2011 census districts and villages list while
The survey adopted a three-stage stratified sample the 2011 census cities/towns list was used for the urban
design in which the first two stages used a readymade survey sampling. In the absence of a definitive list of

27
households (sampling frame), information on various Sample size: The survey covers a total of 50,453
auxiliary variables was collected via specially designed households. The rural sampling encompasses about
listing pro forma that listed households in the selected 27 percent, i.e., 13,697 households spread across
villages and urban blocks. For larger villages/urban 488 villages in 164 districts while the urban sampling
blocks, a proportion of households were listed based on comprises 36,756 households across 1,839 pin code
‘sampling fraction’. areas in 74 cities and towns
Rural Sampling
Stage 1: Selection of Districts Stage 2: Selection of Villages
Within each state, 25 percent of the districts were PPS sampling helped select three villages per district
selected. To select these specific districts, the housing in each large state and two villages per district in each
listings data from the 2011 census was used as a base to of the smaller states. After arranging the villages in
create an economic development index. The key markers ascending order of population, the required number of
used to construct this index were assets ownership and villages was selected.
households possessing bank accounts. To ensure a fair
representation and yet ensure a skew towards higher Stage 3: Selection of Households
income districts, the index’s average value was used as Listing Exercise and Sampling Frame Construction:
a benchmark and 70 percent of the proposed sample In each selected village, the listing required approximately
districts above the State average and 30 percent of the 150 households. Hence, 457 villages generated data
proposed sample districts below the State average were from 68,663 households.
then selected.
Selection of Households:
Since the listing frame required 30 households from each
village, a 68,663 households sampling frame generated
13,697 households’ data.

28
Urban Sampling
SIS 2015 includes sentiment and behaviour data from encompasses 24 additional cities. The scale of the circles
all of the top-50 cities of India (by population) and also in figure 3.2 denotes the number of participants from
that city.
Figure 3.2: SIS 2015: Urban Coverage
Source: SIS 2015

Larger circle size indicates higher sample size while
SEBI INVESTOR SURVEY 2015 smaller circle size indicates smaller sample sizes.
29
Stage 1: Selection of Towns Stage 3: Selection of Households

Using active demat accounts data, 1 to 5 towns Listing Exercise and Sampling Frame Construction:
were chosen from each of the 35 States/UTs. In each Each pin code area was divided into blocks /clusters
State, towns were then arranged in descending order comprising of 100 to 125 households. The survey team
according to the number of active demat accounts. All then identified the block likely to have the maximum
towns that contributed to create a sum total of 50–60 concentration of investors. Within the selected block/
percent demat accounts in the State have been included cluster, about 75 households were then chosen.
in the survey. In smaller States, a single town may alone
contribute 50–60 percent (or more) demat accounts Selection of Households:
while in large States, about 4 to 5 Cities accounted for From each of the above blocks, 20 households were
50–60 percent of the demat accounts. selected at random. Following the urban sampling
design, a 1,36,031 households sampling frame generated
Stage 2: Selection of Pin Code Areas 36,756 households’ data.
From each city/town, 20 pin code areas with the
maximum concentration of demat accounts and 5 pin Table 3.1 displays state-level data on the rural and urban
code areas with a low concentration of demat accounts survey including data on number of districts, sample
were chosen. districts and villages, and households’ listings and
sample data.

30
Table 3.1: All India State-Level Rural and Urban Listings and Samples
RURAL URBAN ALL INDIA

State
No of State and UTs Pin-
Code No. of Sample Sample Listed Sample No. of Sample Listed Sample Listed Sample
Code
Districts Districts Villages Households Households Towns Towns Households Households Households Households
Area
1 Jammu & Kashmir 22 6 17 2475 495 132 2 50 3750 641 6225 1136
2 Himachal Pradesh 12 3 6 900 180 61 3 75 5625 641 6525 821
3 Punjab 22 6 17 2475 495 236 3 75 5625 1922 8100 2417
4 Chandigarh 1 1 1 150 30 7 1 25 1875 641 2025 671
5 Uttrakhand 13 3 7 975 195 121 2 50 3750 641 4725 836
6 Haryana 21 5 16 2363 473 165 2 50 3750 641 6113 1114
7 Delhi 11 3 6 825 165 145 1 25 1875 1179 2700 1344
8 Rajasthan 33 8 24 3600 720 320 3 75 5625 1282 9225 2002
9 Uttar Pradesh 75 19 56 8438 1688 937 5 125 9375 1922 17813 3610
10 Bihar 38 10 29 4275 855 203 3 75 5625 641 9900 1496
11 Sikkim 4 1 1 150 30 9 1 25 1875 641 2025 671
12 Arunachal Pradesh 17 4 8 1200 240 27 1 25 1875 641 3075 881
13 Nagaland 11 3 6 825 165 26 1 25 1875 641 2700 806
14 Manipur 9 2 4 600 120 58 1 25 1875 641 2475 761
15 Mizoram 8 2 4 600 120 23 1 25 1875 641 2475 761
16 Tripura 8 2 4 600 120 42 1 25 1875 641 2475 761
17 Meghalaya 11 3 6 900 180 22 1 25 1875 641 2775 821
18 Assam 27 7 21 3150 630 226 3 75 5625 641 8775 1271
19 West Bengal 19 5 10 1500 300 921 3 75 5625 1820 7125 2120
20 Jharkhand 24 6 12 1800 360 229 3 75 5625 641 7425 1001
21 Orissa 30 8 24 3600 720 238 2 50 3750 641 7350 1361
22 Chhattisgarh 27 7 14 2100 420 205 2 50 3750 641 5850 1061
23 Madhya Pradesh 51 13 39 5850 1170 509 3 75 5625 1282 11475 2452
24 Gujarat 33 8 24 3600 720 385 4 100 7500 3204 11100 3924
25 Daman & Diu 2 1 1 150 30 8 1 25 1875 256 2025 286
26 Dadra and Nagar Haveli 1 1 1 150 30 6 1 25 1875 256 2025 286
27 Maharashtra 36 9 27 4050 810 537 5 125 9375 3742 13425 4552
28 Andhra Pradesh 13 3 10 1463 293 240 3 75 5625 1820 7088 2113
29 Karnataka 30 8 24 3600 720 371 3 75 5625 2461 9225 3181
30 Goa 2 1 1 150 30 71 2 50 3750 641 3900 671
31 Kerala 14 4 8 1200 240 532 2 50 3750 1282 4950 1522
32 Tamil Nadu 32 8 24 3600 720 1109 2 50 3750 1820 7350 2540
33 Pondicherry 4 1 1 150 30 11 1 14 1031 353 1181 383
34 Andaman and Nicobar 3 1 1 150 30 5 1 25 1875 384 2025 414
35 Telengana 10 3 6 900 180 248 1 25 1875 256 2775 436
ALL INDIA 674 175 460 68514 13704 8385 74 1839 137906 36779 206420 50483
Achieved Sample 674 169 457 68513 13703 8385 73 1839 136031 36779 204544 50482

31
Table 3.2 drills down further to the city level for the urban survey, which constitutes more than 70 percent of the
data.
Table 3.2: All India City-Level Sample Size Data
State/City Coverage State/City Coverage State/City Coverage

Andaman Nicobar 384 Jharkhand 641 Rajasthan 1282
Port Blair 384 Dhanbad 213 Jaipur 428
Andhra Pradesh 854 Jamshedpur 214 Jodhpur 427
Guntur 427 Ranchi 214 Udaipur 427
Vizag 427 Karnataka 2463 Sikkim 641
Arunachal Pradesh 641 Bangalore 1179 Gangtok 641
Lower Subansari 641 Gulbarga 641 Tamil Nadu 1825
Assam 641 Mysore 643 Chennai 1183
Guwahati 214 Kerala 1282 Coimbatore 642
Kamrup 214 Kochi 641 Telangana 1225
Tinsukia 213 Trivandrum 641 Hyderabad 967
Bihar 641 Madhya Pradesh 1282 Karimnagar 258
Bhagalpur 214 Bhopal 428 Tripura 641
Muzaffarpur 213 Gwalior 427 Agartala 641
Patna 214 Indore 427 Uttar Pradesh 1921
Chandigarh 641 Maharashtra 3742 Allahabad 384
Chandigarh 641 Mumbai 1178 Ghaziabad 385
Chhattisgarh 641 Nagpur 641 Kanpur 384
Durg 320 Nashik 641 Lucknow 384
Raipur 321 Pune 641 Varanasi 384
Delhi 1178 Thane 641 Uttarakhand 641
Delhi 1178 Manipur 641 Dehradun 321
Goa 612 Imphal 641 Nainital 320
Madgaon 306 Meghalaya 641 West Bengal 1820
Panaji 306 Shillong 641 Bardhaman 427
Gujarat 3204 Mizoram 641 Cooch Behar 427
Ahmedabad 801 Aizwal 641 Kolkata 966
Rajkot 801 Nagaland 641 Daman and Diu 256
Surat 801 Kohima 641 Daman and Diu 256
Vadodara 801 Odisha 641 Dadra and Nagar Haveli 256
Haryana 640 Cuttack 320 Silvasa 256
Faridabad 320 Puri 321 Jammu and Kashmir 641
Gurgaon 320 Puducherry 353 Jammu 321
Himachal Pradesh 641 Puducherry 353 Srinagar 320
Kangra 213 Punjab 1921
Mandi 214 Amritsar 640
Shimla 214 Jallandhar 641
Ludhiana 640
Source: All urban data, SIS 2015

32
Market Participants’ Survey

Over the past few years, there has been a marked and Authorized Persons responded to the survey and
change in the business of Market Participants. A large provided some key insights.
number of brokers and sub-brokers have shut down
in a short time frame. In contrast, a large number of Sample Size Determination
Authorized Persons (AP) have registered in the same A sample size of 1,000 provides robust estimates at 95
period, arguably taking over some of the roles of the percent confidence level (CL) with 2.8 percent error. The
sub-broker. As the regulator of securities markets, it is sample size has been calculated using the formula n = p
imperative that SEBI attempts to understand in detail (1-p) z2/e2, where p is the proportion of the occurrence
the reason for the changes in the industry. Additionally, of variable of interest (considered as 0.5), z is the alpha
market participants play a crucial role in bringing value of level of significance at 95 percent confidence
new investors into the securities market, which SEBI level (1.96) and e is the level of error (.02). Using the
encourages. To capture insights from the supply side, above formula, a sample of 1,000 provides estimates
market participants are included in a separate survey. All at 95 percent CL with 2.8 percent error. Since online
groups of financial intermediaries including Sub-Brokers, surveys have a much lower ‘hit rate’ than pen and paper
Mutual Funds Agents, Brokers, Depository Participants or traditional survey methods, 5,000 e-mails were sent
to allow for an 80 percent failure rate.
Table 3.3: Sample Size Target Distribution
Category Total Population Sample Proportion Sample Size (Email)

Sub-Brokers 65535 32.2% 1611
Mutual Funds Agents 53785 26.4% 1322
Brokers 10023 4.9% 246
DPs 850 0.4% 21
Authorized Persons 73487 36.1% 1807
Total 203385 100.0% 5000
Source: Market Participants Survey, SIS 2015
33
Stage 1 – Distribution of Sample across Target Groups to get the sampling interval (I). The target group was
The 5,000 e-mails were targeted to various financial sorted alphabetically after selecting the respondents
intermediaries based on PPS sampling guidelines. by their valid e-mail IDs. The first sample was selected
using a random number(R) within the sampling interval.
Stage 2 – Sample Selection The corresponding samples were selected by adding the
For each of the categories, the sample was selected sampling Interval I with the Random number … R + I, R
using Systematic Sampling. The financial intermediary + 2I, R + 3I…. till the required sample was achieved. The
Population was divided by the required sample size sampling interval was 41 for all the categories.
Table 3.4: Sample Selection and Sampling Distribution
Category Total Population Sample Proportion Sample Size Sampling Interval

Sub-Brokers 65535 32.2% 1611 41
MFAs 53785 26.4% 1322 41
Brokers 10023 4.9% 246 41
DPs 850 0.4% 21 41
Authorized Persons 73487 36.1% 1807 41
Total 203385 100.0% 5000
The actual sample size achieved is 1,016, which will 2.89 percent error level. The distribution between the
provide robust estimates at 95 percent CL with about types of financial intermediaries in this sample is shown
in Table 3.5.

34
Table 3.5: Distribution of Actual Sample
Category Achieved Sample

Sub-Brokers 311
Mutual Fund Agents 210
Brokers 100
DPs 90
Authorized Persons 305
Total 1016
Chapter 12 analyses the data provided by the Market of information on the Indian retail investor and the
Participants’ survey and provides not only details securities market, which is analysed in the rest of this
about the business of financial intermediaries but also survey report. The uniqueness and robust statistical
a distinct perspective of the markets and the retail basis of the sampling is the core of this analysis. The data
investor’s behaviour. from the listings exercise is additionally used to estimate
the total number of investors based on a bootstrapping
The Listings Exercise, the Final Survey and the Market methodology, using the urban and rural data separately
Participants’ Survey together provides a vast trove at the state level (See Box I Page - 6).

04 AND SAVINGS BEHAVIOUR
35
URBAN HOUSEHOLDS: INVESTMENTS
KEY FINDINGS
è Household awareness of savings schemes is significantly higher than a

cognizance of investment instruments.
è Primary motivation for investing is capital gains, closely followed by

lifestyle improvement plans.
è About 15 Percent of survey respondents participate in securities

markets.
è Middle-income groups save more as a percentage of their annual

income than the highest income groups.
è Clear inverse linear relationship between income and debt levels;that

is, as income levels increase, debt (as percentage of income) falls.
è The SIS data finds that even among households that invest, it is
education and occupation and not factors such as age, household size
or marital status that are primary drivers.
è Successful outreach efforts have created improved awareness and thus,

most investors (66 Percent) invest in mutual funds rather than equities
(55 Percent).
è There is a direct linear correlation between higher education levels and

superior porfolio diversification

36
Chapter Rationale
With a savings rate of 31 percent (savings as percentage non-linear relationship between savings and income.
of GDP), the 2014 World Bank data26 situates India Conversely, on the debt side, there is a clear inverse
among the top-20 saver nations in the world. However, linear relationship between income and debt levels.
most of these savings accumulate in bank deposits, In spite of new sources of credit availability (like credit
physical assets and currency. According to the “Changes cards) and an easier access to traditional loans (like
in Financial Assets/Liabilities of the Household Sector” personal, car and student loans or mortgages),wealthier
data from the Handbook of Statistics on Indian Economy households have lower debt. Probing further into
2014–15 of the Reserve Bank of India (RBI)27, investments investment instruments preferences, the SIS data shows
in shares (including mutual funds) and debentures is that there is no relationship between household income
`57,000 crore for that year, which is 4.6 percent of all and the choice of investments instruments like equity
household asset growth. While this is a sharp increase or mutual funds; however, lower-income groups tend to
from `32,300 crore, which is 2.5 percent of all household invest more in debt instruments, which are low risk.
asset growth from the previous year, it still remains at
muted levels. Supporting this RBI finding, the SIS data also Furthermore, the SIS data finds that it is education and
discovers that even though just 15 percent of the survey occupation and not factors such as age, household size
respondents are investors, household awareness of or marital status that are primary drivers of investment.
savings schemes is significantly higher than a cognizance It seems that the Government of India (GoI) and SEBI’s
of investment instruments. A detailed analysis of the SIS successful outreach efforts have also created improved
data shows that the primary motivation for investing is awareness for certain instruments (like mutual funds)
capital gains, closely followed by lifestyle improvement and consequently, most investors (66 percent) invest
plans and that, surprisingly, middle income groups save in mutual funds that are diversified and thus, safer and
more as a percentage of their annual income than the more reliable than equities (55 percent). In fact, there
highest income groups in the survey; thus, creating a is a direct linear correlation between higher education
levels and superior portfolio diversification.
26. World Bank, Data: Gross Savings (% of GDP), Washington DC: World Bank, last accessed 30 December, 2015,
http://data.worldbank.org/indicator/NY.GNS.ICTR.ZS
27. Reserve Bank of India, Table 12: Changes in Financial Assets/ Liabilities of the Household Sector (At Current Prices), New Delhi: Reserve Bank of India, 16
September, 2015, last accessed 30 December, 2015, https://www.rbi.org.in/scripts/PublicationsView.aspx?id=16453
37
Introduction
The SIS 2015 has a forward-looking agenda that focuses been conducting the All India Debt and Investment
on investor sentiments and perceptions and, at the Survey (AIDIS); the key findings from the latest (70th)
same time, meticulously records data on investment round was published in December 201428. Nevertheless,
patterns and behaviour. Comparably, to understand the the NSSO survey’s coverage, while analogous to the
investment and savings behaviour of Indian households, current survey, does not aim to generate a profound
the National Statistical Survey Organization (NSSO) has understanding of investor attitude– it is primarily a data
collection tool.
Investments and Savings: Awareness and Preferences

While a significant portion of this survey focuses in the securities markets (namely, in Mutual Funds,
primarily on investors, the current section attempts to Equities, Derivatives, Debentures/Bonds or Commodity
analyse the awareness of financial and non- financial Futures). Of the SIS’s total 36,756 urban sample size,
instruments – both for savings and investments. 14.57 percent (5,356) are investors. Table 4.1 provides
Investors are survey respondents who have participated a list of all the investment and savings instruments that
respondents were specifically asked about in the survey.
Table 4.1: List of instruments provided to Survey Respondents
List of Instruments
Bank Deposits (Fixed/Recurring/ Post Office Savings Schemes
Company Deposits
Savings) e.g., NSS, KVP etc.
Life Insurance Pension Schemes
Real Estate Precious Metals (Gold/Silver/Platinum)
Equities/Stocks/Shares Mutual Funds/SIPs Debentures/Bonds
Commodities Futures Derivatives (Equity/Currency)
Legend: Investment Instruments highlighted in yellow
28. National Sample Survey Office, Key Indicators of Debt and Investment in India NSS 70th Round, 2013, New Delhi: Ministry of Statistics Programme
Implementation, last accessed December 30, 2015,
http://mospi.nic.in/Mospi_New/upload/KI_70_18.2_19dec14.pdf
38
To help quantify the number and the behaviour of between savings schemes and investment instruments;
potential investors and savers who did not participate cognizance about savings schemes is significantly higher.
in the securities markets, respondents were specifically While awareness concerning company deposits is lower
asked about non-investment instruments of savings or than that of mutual funds or equities, a familiarity
capital formation. As Figure 4.1 clearly demonstrates, with every other savings schemes and non-market
there is a sharp distinction in the awareness levels instruments is significantly higher than that of any of the
market instruments.
Figure 4.1: Awareness Levels of Financial and Investment Instruments
100.0% 99.9% 94.7%

89.4%
80.0% 72.8% 72.3%
60.0%
42.9%
40.0%
28.4% 26.3%
18.6%
20.0% 13.1% 10.4% 9.5%
0.0%
N = 36,756 (all urban respondents, SIS 2015)
Additionally, although nearly all the survey participants even lower and surprisingly, Debentures (13.1 percent),
are staggeringly aware of Bank Deposits (99.9 despite being higher in the capital stack and having a
percent),Life Insurance (94.7 percent) and Post Office declared interest rate, ranks low too. Correspondingly,
Savings (89.4 percent), familiarity with Mutual Funds in 2003, Senetal29 observe that the secondary corporate
and Equities is just 28.4 percent and 26.3 percent, bond market in India is practically non-existent and
respectively (Table 4.2). On the other hand, awareness in March 2015, Gwalani and Bharati30. also find that
of Derivatives (10.4 percent) and Futures (9.5 percent) is awareness and investments in the corporate bond
markets remain abysmally low.
29. Pronab Sen, Nikhil Bahel and Shikhar Ranjan, Developing the Indian Debt Capital Markets: Small Investor Perspectives, New Delhi: Planning Commission,
Government of India, July 2003, last accessed 18 December, 2015,
http://planningcommission.nic.in/reports/wrkpapers/wkpr_debt.pdf
30. Hema P. Gwalani and D. B. Bharati, “An Analytical Study of the Awareness Level of Corporate Bond Market in India Among Retail Investors”,
IBMRD’s Journal of Management and Research, Vol. 4, March 2015, pp. 75–87
39
For derivatives, on the other hand, it is not the market’s remained restricted to the shadow ‘badla’ markets
novelty but a 1950s government statute that rationalizes (banned by SEBI in 2001) and definitely out of reach
the low level of awareness. The Bombay Cotton Traders of retail investors32. Since 2008–09, equity derivatives
Association started futures trading in 1875 and by the at the NSE have increased from an average daily
early 1900s, India had one of the largest futures trading turnover of `45,310 crore to `1,93,212 crore in 2015–
markets in the world . However, cash settlements and
31
1633. Although a relatively smaller market, currency
trading in options and derivatives were banned in 1952 derivatives has seen a sharper growth, moving from
till (acting on the recommendations of the LC Gupta `1,167 crore to `18,602 crore in daily turnover in the
Committee) SEBI approved derivatives trading from same time period34. Furthermore, it is clear from the SIS
June 2001. In the interim half a century, derivatives and RBI data that institutional investors drive almost the
entire volume and growth of this market.
Table 4.2: Household Awareness of Investment Instruments
Awareness of Investment Equity/Currency Commodity

Mutual Funds Equities Debentures
Instruments Derivatives Futures
Awareness 28.4% 26.3% 13.1% 10.4% 9.5%
Investor Awareness 84.6% 79.4% 48.2% 33.6% 29.2%
Non-Investor Awareness 18.7% 17.1% 7.0% 2.4% 6.1%
According to the SIS 2015 data, the awareness level for investors while an awareness of derivatives, bonds and
savings instruments are almost identical amongst debentures is in the single digits. This data shows that
investors and non-investors, whereas (as Figure 4.1 there is a need to reach out and educate a wider
significantly highlights) a familiarity with investment populace about options available in the securities
instruments is extremely low amongst non-investors. markets and additionally, expound the effectiveness of
Awareness of even traditional investments like equities probing more deeply into the benefits of diversification,
and mutual funds is surprisingly low among non- risk management and returns optimization to create a
more efficient household financial portfolio.
31. Asani Sarkar, “Indian Derivatives Markets”, The Oxford Companion to Economics in India, Ed: Kaushik Basu, New Delhi: Oxford University Press, 2006, last
accessed March 15, 2016,
https://www.newyorkfed.org/medialibrary/media/research/economists/sarkar/derivatives_in_india.pdf
32. Ibid.
33. National Stock Exchange, “Business Growth in FO Segment”, NSE website, last accessed March 10, 2016, https://www1.nseindia.com/products/content/
derivatives/equities/historical_fo_bussinessgrowth.htm
34. National Stock Exchange, “Business Growth in CD Segment”, NSE website, last accessed March 10, 2016, http://www.nseindia.com/products/content/
derivatives/currency/cd_historical_businessGrowth.htm
40
To further investigate the specific motivations that 2015 closely scrutinized their decision-making and
govern a household’s investing preferences, the SIS investment rationale.
Figure 4.2: Why do Households Invest
Capital Gains 2594
Improve Lifestyle 2495
Liquidity Needs 1994
Home Buying 1760
Education 1471
Regular Income 1320
Retirement 1301
Tax Saving 1248
Bequest 527
Charitable 276
Social Function 140
0 500 1000 1500 2000 2500 3000
N = 5,356 (all urban investor, SIS 2015). Optional question answered by 5,313 investors.
Respondents could check multiple options.
According to Figure 4.2, capital gains, which are “… an liquidity needs and home buying also play crucial roles.
increase in the value of a capital asset (investment or real Additionally, since there are almost no investment
estate) that gives it a higher worth than the purchase opportunities (as opposed to savings schemes) that
price” , is the primary purpose for household investing.
35
allow for tax savings, this factors significantly lower in
Thus, capital gains closely followed by lifestyle the list. With just 3 percent of Indians paying income
improvement are the key motivations for investing while taxes36, the indifference towards tax savings schemes
may also be a consequence of the insignificant tax net.
35. Merriam-Webster’s Collegiate Dictionary, s.v., “capital gain”, last accessed December 11, 2015,
http://www.merriam-
webster.com/dictionary/capital%20gain
36.“Less than 3 percent File Income Tax Return in India”, Deccan Herald, December 19, 2012, last accessed December 19, 2015,
http://www.deccanherald.com/content/299566/less-3-percent-file-income.html
41
While investment rationale, that is, “Why do I invest?” contingencies or for investment returns. The SIS data
is a crucial element of the survey, key drivers of broader supports this hypothesis; in urban India, the limit is
financial savings (in both investment and other financial above or around the `20,000 per month level. The data
instruments), that is, “What Drives Me to Save?” is also reveals that middle-class households in the `20,000
also an important question that needs to be explored. to `50,000 range, followed closely by the `50,000 to `1
Figure 4.3 shows the distribution of savings amongst lakh income group, have a higher marginal propensity to
households by income levels. The economic reasoning save. Unexpectedly, the figures disclose that 80 percent
behind the linear income-savings hypothesis is logical of households with monthly income greater than 1 lakh
and derives directly from basic development economics. also have savings less than 40 percent of annual income.
Since all additional income is expended to supplement While this seems to go against the linear income-
basic needs, lower income groups have a higher savings hypothesis, it is crucial to keep in mind that this
marginalpropensity to consume . Figure 4.3 backs this
37
high- income segment may have social safety nets (like
claim as the data shows that 85 percent of those in insurance, family support, etc.) that allow them to have a
the < `20,000 income range have savings less than 40 lower “precautionary demand for savings”. Additionally,
percent of annual income. Once the threshold of basic with just 3 percent of Indians paying income taxes, the
needs is crossed, households start saving for future top tier of the high-income group are arguably less keen
to disclose their incomes and savings.
37. See Chapter 7, Debraj Ray, Development Economics, Princeton, NJ: Princeton University Press, 1998
42
Figure 4.3: Total Household Savings as a Percentage of the Household’s Annual Income
90.0% 85.1%
79.2% 79.6%
66.6%
60.0%
27.6%
30.0%
16.9%
12.1% 12.2%
8.2%
5.8% 3.9%
2.8%
0.0%
< `<20,000
20,000 20,000–50,000
`20,000-`50,000 50,001–1
`50,001- lakh
`1 lakh >>`1
1 lakh
lakh
< 40% 40%–60% > 60%
Monthly Income
Savings
Below `20000 `20000 -`50000 `50000 - `1 Lakh Above `1 Lakh
< 40% of annual income 10569 8833 2920 5513
40%–60% of annual income 1506 3660 624 843
> 60% of annual income 341 771 143 569
Total 12416 13264 3687 6925
To probe further into household indebtedness, the other income groups. Analogous to the low-income group,
side of the savings coin, we perform a similar analysis. nearly a third of the mid-income group households are
In this case, the income-debt inverse linear relationship indebted at the 40 percent to 60 percent of income
holds true – the higher the household income, the lower level. With the rise of indebtedness in the middle class
the debt levels drop. Figure 4.4 confirms that 31 percent owing to the upsurge of credit instruments like credit
of low-income households (with monthly incomes cards, easier car loans, student loans and housing
less than `20,000) have debts larger than 60 percent loans, this is a foreseeable outcome. While high-income
of their annual income, whereas just 6 percent of `1 groups also show a comparable increase in the use of
lakh+ households have matching debt levels. However, credit instruments, their elevated income levels possibly
contrasting the survey findings on savings, the higher balance and thus, do not significantly affect their
income households have lower debts than the mid- indebtedness ratios.
43
Figure 4.4: Total Debt as Percentage of Annual Income
90.0%
81.1%
74.6%
60.0% 57.2%
39.4%
30.1%30.5% 30.1%
30.0%
16.4%
12.8% 12.9%
9.0%
6.0%
0.0%
<<`20,000
20,000 20,000–50,000
`20,000-`50,000 `50,001–1 lakh
50,001-`1 lakh > >`1
1 lakh
lakh
< 40% 40%–60% > 60%
Monthly Income
Debt
Below `20000 `20000 -`50000 `50000 - `1 Lakh Above `1 Lakh
< 40% of annual income 4892 7580 2751 5619
40%–60% of annual income 3733 3993 605 894
> 60% of annual income 3791 1691 331 412
Total 12416 13264 3687 6925
Table 4.3 shows the average household total debt for This is indeed welcome news for Indian policy makers
the entire surveyed population as a percentage of total since it assertively showcases the low indebtedness in
annual income. While 58 percent of the participants had the country. For instance, the United States has a $1,185
debt that was less than 40 percent of annual income, thousand crore total household debt. With a population
25 percent had debt levels in the 40 percent to 60 of about 30 crore, an average household size of 2.84
percent of annual income range, and a mere 17 percent people and an annual median income of $51,939, the
had debt more than 60 percent of annual income. total US indebtedness number in relation to its annual
38. The Organisation for Economic Co-operation and Development (OECD), “Household Debt: Total % of Net Disposable Income, 2014”, National Accounts a t a
Glance, l a s t accessed March 30 , 2016 ,
h t t ps : / / data. oecd. o rg/ hha/ household- debt. h tm
39. McKinsey Global Institute, Debt and (Not Much) Deleveraging, London: McKinsey & Company, February, 2015, last accessed December 10, 2015,
http://www.mckinsey.com/global-themes/employment-and-growth/debt-and-not-much-deleveraging
44
income is over 190 percent. Additionally, the Household of the list at 400 percent), the US (16th on the list at 233
Debt to Disposable Income statistic for the US38 stands percent) and the United Kingdom (13th on the list at 252
at 113 percent of its annual income. The SIS 2015 data percent) have actually been increasing, India’s national
on debt (Table 4.3) is consistent with McKinsey’s 2015 leverage ratio has essentially remained constant in the
report, “Debt and (Not Much) Deleveraging”39 in which past 7 years and stands at 120 percent of GDP (rank 35).
India’s rank just misses the lowest quartile among the 47 The Indian Debt to GDP ratio is significantly lower even
nations listed. According to the report, while the Debt- when compared to other large developing countries
to-GDP ratios for developed economies like Japan (top like China (217 percent), South Africa (133 percent) and
Brazil (128 percent).
Table 4.3 – Household Total Debt as Percentage of Annual Income
Debt Frequency Percentage

< 40% of annual income 21238 57.5%
40% - 60% of annual income 9279 25.0%
> 60% of annual income 6239 16.5%
The Education-Occupation-Investment Interrelationship

Grable (2000)40 establishes a relationship between driver of savings and that investor distribution is skewed
multiple underlying socio-demographic factors (like towards the higher educated groups. According to the
education, income, age and marital status) and financial SIS data, while 25 percent of the highly educated (15+
risk tolerance. The direct linear relationship between years of education) invest in the securities markets, less
investments and education (Fig. 4.5) may also help than 1 percent of those with 1 to 7 years of education
further rationalize the survey’s unanticipated outcome do so. This percentage increases to 6 percent and 15
that clearly ascertains that income is not a primary linear percent for 8-10 years and 11-15 years of education,
respectively.
40. John E. Grable, “Financial Risk Tolerance and Additional Factors that Affect Risk Taking in Everyday Money Matters”, Journal of Business and Psychology,
Vol. 14 (Summer 2000)
45
Figure 4.5 – The Education-Investment Relationship
30.0%
24.9%
25.0%
y = 0.063x - 0.0931
R² = 0.91
20.0%
15.4%
15.0%
10.0%
5.7%
5.0% 1.3%
0.5%
0.0%
Not Literate 1–7 Years 8–10 Years 11–15 Years > 15 Years
N = 5,356 (all urban investors, SIS 2015)
According to the SIS data, income and education may possibly be an effect of the steady incomes amongst
significantly influence investment choices while government employees. According to the SIS data, 23
variables like age seem to have a very limited effect on percent of government employees and only 11 percent
whether a respondent chooses to invest or not. The of private employees are investors and thus, it seems
average age for both investors and non-investors is 41 that occupation has an effect on investment behaviour.
years. Similarly, marital status and household size show Additionally, since 17.5 percent business owners are
no significant effect on the choice to invest. However, also investors, the data concludes that business owners,
government and private employees show a considerable too, have a higher likelihood of investing. SIS’s Chapter 9
disparity in their predilection to invest (Table 4.4), which analyses risk tolerance and the various factors affecting
it in detail.

46
Table 4.4 – Investors by Occupation
Occupation Non-Investor (%) Investor (%)

Service (Government) 76.9% 23.1%
Business (Shop Owner) 80.7% 19.3%
Other Business 83.7% 16.3%
Service (Private) 89.4% 10.6%
Retired 91.5% 8.5%
Agriculture 95.7% 4.3%
Others (Specify) 96.4% 3.7%
Self Employed 96.8% 3.2%
Total 85.4% 14.6%
Savings and Investment Instruments: Household Preferences

Figure 4.6 shows the actual percentage of investors/ After China, India is the second largest consumer of gold.
savers in each of the instruments discussed in the first With over 600 tons being used in jewellery production
half of this chapter. It is apparent that non-market alone, Indian households are estimated to own 22,000
related instruments, including comparatively higher tons of the metal41. While gold prices have corrected
risk assets like precious metals or real estate, are significantly over the past few years, more Indians would
clearly more popular. Long considered a safe, long rather continue to use gold as a savings instruments
term, and compulsory savings instrument, India has the than invest in mutual funds or equities. Although the
highest incidence of life insurance buyers in the world. Residex Indian Real Estate Index for the top-20 cities has
Predictably, post office savings schemes with their wide shown flat or marginal growth in nearly all cities over
reach and network and risk-free schemes are also a the past 12 to 24 months42, this sector, too, continues to
crucial savings instrument. However, the chart highlights be a primary instrument of capital formation for Indian
a crucial bias towards precious metals and real estate. households.
41. World Gold Council, “Developing Indian Hallmarking: A Roadmap for Future Growth”, July 30, 2015, last accessed April 7, 2016,
http://www.gold.org/download/file/4025/Developing-Indian-hallmarking.pdf
42. National Housing Bank, NHB Residex January–March 2015, last accessed 16 December, 2015,
47
Figure 4.6 – Investment and Savings Vehicles Used by Survey Respondents
0% 20% 40% 60% 80% 100%
Bank Deposits 95.0%
Life Insurance 61.7%
Precious Metals 30.3%
Post Office Savings Schemes 30.1%
Real Estate 16.5%
Mutual Funds/SIPs 9.7%
Equity/Stocks/Shares 8.1%
Pension Schemes 8.1%
Company Deposits 4.3%
Debentures/Bonds 3.5%
Derivatives (Equity/Currency) 1.4%
Commodities Futures 1.0%
N = 36,756 (all urban respondents, SIS 2015). Respondents could check multiple options.
The SIS 2015 data illustrates that the universe of retail the GoI’s and the mutual fund industry’s sustained and
derivatives investors, on the other hand, is very small extensive outreach efforts43. The Association of Mutual
with less than 10 percent of investors using Currency/ Funds in India (AMFI), which is an association of SEBI-
Equity derivatives or Commodity Futures. Amongst registered mutual funds in India and has all the 47 SEBI-
investors, mutual funds are the most popular investment registered asset management funds as its members, has
instrument (66 percent) while more than half invest in been spearheading the effort to publicize the importance
equities (55 percent) and less than a quarter invest in of mutual funds to retail investors. According to the AMFI
debentures or bonds. The large number of investors in website, between April 2016 and December 2016, there
mutual funds are most likely a direct positive result of are 185 confirmed investor awareness programs that
will be conducted by member firms across the country44.
43. Shaji Vikraman, “Slow Start, Rapid Growth: Story of India’s Mutual Funds Industry”, Indian Express, September 17, 2015, last accessed March 15, 2016,
http://indianexpress.com/article/explained/slow-start-rapid-growth-story-of-indias-mutual-funds-industry/
44. Association of Mutual Funds in India website, last accessed April 7, 2016, https://www.amfiindia.com/
48
Figure 4.7 – Prefered Investment Instruments
75.0%
66.0%
54.9%
50.0%
23.5%
25.0%
9.5%
6.9%
0.0%
Mutual Funds/SIPs Equities Bonds Derivatives Commodity Futures
N = 5,356 (all urban investors, SIS 2015). Respondents could check multiple options
Urban Investment Preferences

In this section, urban investors’ choices are analysed in instruments whereas debt instruments are noticeably
detail whilst carefully differentiating between the socio- more popular among lower income groups. 30 percent
economic characteristics of equity, mutual fund and debt of Range I investors invest in bonds and debentures while
investors. Although most income groups invest primarily only 23 percent of Range II and 11 percent of Range
in mutual funds, the SIS data shows that 70 percent of III investors invest in bonds, respectively. However,
the top tier middle-income group (`50,000 to `1 lakh) among Range IV investors, this number increases again
invests in equities (Table 4.5). With reference to equities to 26 percent. It is unsurprising that lower risk debt
and mutual funds, no well-defined relationship can be instruments appeal to a lower income client base, and
perceived between income and choice of investment yet, this may also be an effect of successful inroads built
by retail bond sales executives.

49
Table 4.5: Investment Instrument Choice, by Income
Range Income Range Mutual Fund Investor Equity Investor Debt Investor Total Investors Total Respondents
I Less than 20,000 729 665 311 1033 12688
(% of Total Investors) 70.6% 64.4% 30.1% 100.0%
II 20,000 to 50,000 2161 1626 732 3236 13403
III 50,000 to 1 lakh 195 336 54 478 3721
IV Above 1 lakh 451 314 159 609 6944
As observed earlier, education may have a significant instruments than mutual funds (which are diversified)
influence on choice of investment instruments. Table 4.6 or bonds (which are higher in the capital stack), the SIS
provides two key insights into education and choice of data proves that mutual fund and debt investing are
investment instruments. First, complementing Grable’s not affected significantly by income levels while higher
(2000) argument that higher education leads to a higher levels of education lead to an increased appetite for
financial risk appetite and as equities are higher risk equity investing.
Table 4.6: Education and Investment Instrument Choice
Education Mutual Fund Investor Equity Investor Debt Investor Total Investors
1 to 7 Years 22 9 0 32
8 to 10 Years 273 108 90 445
11 to 15 Years 1299 1155 470 2324
More than 15 Years 1939 1667 696 2551

50
The second interesting outcome shows that investors for investment choices, the cultural aspect is probably
with more years of education invest in higher number of the most important driver that determines whether an
instruments, which clearly indicates a greater realization individual invests in the securities markets or not. While
of the value of diversification in the securities markets. the state-level and zonal-level details of investors, their
Among those with 15+ years of education, 76 percent choice of investment instruments and cross-tabulations
invest in mutual funds, 65 percent invest in equities and used to further analyse their choices are provided in
27 percent in debt while among those with 11 to 15 Chapter 10, Table 4.7 shows the investor distribution
years of education, 56 percent invest in mutual funds, by zone (including data on investment instruments
50 percent in equities and 20 percent in debt. A similar choices). The West Zone leads not only in the total
pattern is also seen among those with 8 to 10 and 1 to 7 number of investors but also in awareness of investment
years of education. instruments. Additional evidence that supports this
finding underlines that despite 20 regional exchanges
One of the key findings of this report is that although shutting down in the last fiscal year, the volumes in the
economic and demographic considerations are crucial Bombay Stock Exchange have kept increasing steadily.
Table 4.7: Investors and Investment Instruments used by zone
Instrument East North South West

Mutual Funds 633 859 212 1832
Equities 143 804 157 1837
Debentures 37 218 88 913
Derivatives 0 212 5 294
Commodity Futures 163 143 19 44
Total Investors 812 1419 385 2740

51
Why Don’t More Households Invest?

As can be seen from the previous analysis, there exists lack of awareness about key instruments (Figure 4.1) is
a large pool of households from a high to mid income certainly a primary roadblock, more than 40 percent of
group who are educated and who save (in bank accounts, households that are aware of investments like mutual
life insurance, or post offices), and yet do not invest. The funds or equities, do not invest in the markets. To
fundamental rationale behind their non-participation in compartmentalize and rationalize this non-participation,
securities markets is of paramount importance to policy Figure 4.8 and Figure 4.9 analyse the data on why
makers and the securities market regulator. While a households do not invest in specific instruments.
Figure 4.8 – Why Do Households not Invest in Mutual Funds?
Others
Investment not very
6.1%
liquid
8.3%
Not sure about safety

Lack of expertise of investments
12.6% 33.3%
Inadequate
information
14.1% Inadequate returns
25.6%
Note: Other includes Absence of investment through cash (3%), Limited access (1%), Not sure whom to approach (1%) and Requirements like PAN (0.2%)

52
Figure 4.9 – Why Do Households Not Invest in Equities?
Others
8.6%
Investment not very
liquid 13.4%
Not sure about safety of

investments 25.6%
Inadequate returns
15.4%
Inadequate information
21.3%
Lack of expertise 15.6%
Note: ‘Others’ includes not sure whom to approach (4%), inadequate returns (3%), Limited access (1%) and Requirements like PAN (0.2%)
The above figures show that the typical impulse for not of the superior risk adjusted returns of mutual funds
investing in securities markets instruments is principally and equities and seem to consider individual savings
risk aversion (i.e., apprehension concerning the safety of and investment instruments independently instead of
a particular instrument) followed by inadequate returns calculating their optimal weights in a diversified portfolio.
and lack of information. A sustained and widespread Moreover, from a regulators’ standpoint, the data
mutual fund information dissemination in India has quite clearly highlights that none of the requirements
ensured that information availability is not a concern. and restrictions put in place for securities markets
Respondents seem more anxious regarding mutual investing have become impediments for potential
funds returns. On the other hand, investors are not fully investors. Very few respondents (less than 1 percent)
cognizant about equities, especially its diversity benefits desist from investing due to regulatory issues like KYC
and comparative returns, especially when compared requirements, PAN card requirements or restriction on
to mutual funds. Potential investors are also not aware cash investments.

05 AN UNTAPPED INVESTOR BASE
53
RURAL SAVERS:
KEY FINDINGS
è There are a mere 32 investors (0.234 percent) amongst the 13,697 rural
survey respondents.
è Of these investors, 21 (66 percent) invest in mutual funds, 4 (12.5

percent) invest in equities and 7 (22 percent) invest in bonds and
debentures although none have ever invested in derivatives or futures.

è However, 95 percent of rural survey respondents have bank accounts,
47 percent have life insurance, 29 percent have post office deposits and
11 percent save in precious metals.
è Although the SIS data showcase a high propensity to save, these potential
investors do not participate in the securities markets – possibly, due to
a lack of awareness.
è Almost all respondents are aware of bank deposits while 88 percent

and 76 percent are aware of life insurance and post office savings,
respectively. The awareness levels for mutual funds and equities are
1.4 percent although less than 0.5 percent are cognizant of futures,
derivatives or debentures.
è The SIS data does not find a clear linear relationship between
education, income and/or occupation and investments amongst the
rural population.
è On mapping out the data, the SIS discovers that rural investors tend
to reside close to the local district headquarters or urban centres like
Delhi, Bangalore and Hyderabad.

54
Chapter Rationale
From the earliest available data (1952) it is seen that According to the SIS data, nearly 40 percent of the
despite rising rural income and education, improving rural respondents earn more than `20,000 per month
access to electricity and roads, and the significant while 24 percent of households have a total savings of
growth in financial inclusion, the rate of investments in 40 percent to 60 percent of their annual income and a
the securities markets from the rural Indian population further 7 percent have savings higher than 60 percent
has been dismally low. According to SIS 2015, just 0.234 of their annual income. Although these households,
percent of rural survey respondents are investors. Even which have the income levels and the tendency to save,
among these few investors, there is not one engaged in can potentially participate in the securities markets,
derivatives or futures or invested in more than one asset the percentage of investors is as low as that of the
class while 66 percent invest in mutual funds, 22 percent broader rural average. Moreover, contrasting the urban
in bonds and 12.5 percent in equities. However, since survey, the rural SIS data does not find a find a clear
95 percent of rural households have bank savings while linear relationship between education and investments
47 percent and 29 percent of respondents use savings amongst the rural population. Despite 1.2 to 1.5 crore
instruments from life insurance companies and the post households with comparable education, income and
offices, respectively, these low investment numbers savings propensity, the data estimates that there are
are not simply due to a lack of financial inclusion. With one crore rural investors. Arguably, an increase in
merely 1.4 percent of respondents barely familiar with awareness levels and information accessibility amongst
mutual funds or equities and less than 0.5 percent the percentage of rural households who use various non-
who have scarcely even heard of bonds, futures and market instruments for capital formation could directly
derivatives, it appears that there is a complete lack result in potential investors in the securities markets.
of awareness concerning these securities markets Appropriate awareness programs and outreach efforts
instruments amongst the rural population. could certainly help in bringing these potential investor
households into the securities markets fold.

55
Introduction
In 1964, the Economic Weekly (now Economic and related assets of total value of household assets in rural
Political Weekly)45 published one of the earliest (post- areas is only 0.07 percent while the SIS 2015 data shows
Independence) research studies on the rural investor. that just 0.23 percent of rural households invest in
To study the decadal difference in capital formation securities markets assets.
amongst rural households, this survey compared the
data from the all India Rural Debt and Investment Survey Based on the SIS 2015 findings and utilizing the trends
(1961-62) with the all India Rural Credit Survey (1951- and patterns observed among the larger urban data set,
52) and concluded that, “The relatively small value of this chapter tries to estimate the number of potential
capital formation by rural households is thus perhaps rural investors. This survey should help policy makers
the most disturbing finding of the Reserve Bank’s and the government to quantify the size of this potential
Survey”. Half a century later, both the All India Debt and financial consumer base and also aid them to determine
Investment Survey (AIDIS) (2013, 70th edition)46 and the necessity and process of enabling rural savers to
the SIS 2015 data also conclude that although savings become securities markets investors. In the current
rates and awareness has significantly increased, the context of the GoI’s Pradhan Mantri Jan Dhan Yojana
investment in securities markets still remains extremely (PMJDY) and the focus on financial inclusion, this survey
muted amongst the rural population. According to the with its detailed pan-India rural data can certainly help
AIDIS data, the percentage of shares and other markets- define a future road map.
The (Elusive) Rural Investor

In sharp contrast to the 14.5 percent investors in the survey, investments in mutual funds are significantly
total urban survey respondents, there are only 32 higher than equities or bonds (Figure 5.1). Of the 32
investors (0.234 percent) amongst the 13,697 rural rural investors, 21 (66 percent) invest in mutual funds,
survey respondents. However, comparable to the urban which is almost exactly equal to the percentage of urban
45. Economic Weekly, “Rural Debt and Investment”, Vol. 16, Issue 4, January 1964
46. National Sample Survey Office, Key Indicators of Debt and Investment in India NSS 70th Round, 2013, New Delhi: Ministry of Statistics Programme
Implementation, last accessed December 30, 2015,
http://mospi.nic.in/Mospi_New/upload/KI_70_18.2_19dec14.pdf
56
respondents who invest in these funds. Only 4 (12.5 has ever invested in derivatives or futures. Since riskier
percent of investors) and 7 (22 percent of investors) out investments like derivatives are completely absent
of the surveyed population invest in equities and bonds/ from their portfolios and equities lag behind safer debt
debentures, respectively, whereas not one respondent investments (unlike in the urban areas), the risk aversion
amongst the few rural investors is undeniably palpable.
Figure 5.1: Investments in Different Asset Classes Amongst Rural Investors
25
21
20
15
10
7
5 4
0
Mutual Funds/SIPs Equities Debentures
N=32 (all rural investors, SIS 2015)
On the other hand, it is crucial to keep in mind that the respondents have bank accounts, 47 percent own life
reported lack of investments does not automatically insurance while 29 percent possess post office savings.
translate to a complete absence of financial inclusion in Thus, the data confirm that the Indian government’s
Indian villages. A significant part of the population who focus on financial inclusion by increasing the number
possess savings banks accounts or post office deposits of rural banks and providing outreach messages via
certainly participate in the financial system. As Figure mass media in villages to encourage traditional banking
5.2 unmistakably asserts, 95 percent of rural survey habits has been remarkably successful. With 47 percent

57
of the surveyed rural population owning life insurance life insurance as a standard instrument of long-term,
policies, the insurance companies have also impressively regular savings. Comparably, with its reach of 1,54,866
succeeded in including the rural population in their fold. post offices (of which 1,39,080 or nearly 90 percent
The Life India Corporation of India (LIC), which was formed are in rural areas), post office savings schemes too
in 1956, has relentlessly disseminated information on are an easily accepted method of capital formation. In
insurances across the country for the last sixty years. Its Chapter 4, the SIS 2015 data confirms that newer forms
widespread success is reflected in both the SIS’s urban of investments and savings have limited awareness and
and rural savings data. With its 1,20,388 employees and thus, lower investments. Since the broader appeal and
an agent base of more than 10 lakhs (11,95,916 as on reach of the securities markets began post-liberalization,
31st March 2014) , the LIC, alone, is instrumental for the
47
it has relatively limited awareness when compared to
ease with which the general Indian population accepts insurance.
Figure 5.2: Instruments for Savings and Capital Formation used by Rural Households
100.0% 95.1%
80.0%
60.0%
47.2%
40.0%
28.9%
20.0%
10.7%
6.0% 3.9% 2.9%
0.0%
N=13,697 (all rural respondents, SIS 2015)
47. Life Insurance Corporation of India website, last accessed December 30, 2015,
http://www.licindia.in/
58
According to SIS 2015 data, nearly 100 percent of less than 0.5 percent respondents even know about
respondents are aware of bank deposits, 88 percent are futures, derivatives or debentures. This bleak scenario
aware of Life Insurance while 76 percent are cognizant of investing amongst rural households seems to be a
of Post Office savings whereas, the awareness levels for consequence of the lack of awareness about different
mutual funds and equities are both 1.4 percent while investment instruments (Figure 5.3).
Figure 5.3: Awareness of Savings, Investment and Capital Formation Instruments
Bank Deposits 99.9%

Life Insurance 87.9%
Post Office Savings 76.1%
Precious Metals 43.5%
Real Estate 26.7%
Pension Schemes 19.4%
Company Deposits 6.2%
Equities 1.4%
Mutual Funds 1.4%
Debentures 0.6%
Derivatives 0.4%
Commodities – Futures 0.3%
0% 20% 40% 60% 80% 100% 120%

59
Potential Rural Investors

Using the analysis on urban household investments savings rates are significantly lower than urban areas
(Chapter 4), this section tries to estimate the total (an effect of lower real income in rural areas), nearly
number of potential rural investors in India based a quarter of households have total savings in Range II
on income levels, investments and savings. Before while more than 7 percent have total savings in Range
scrutinizing the three primary drivers of investments, III. There are more than 22 crore rural households in
which are income, education and occupation, it is India and amongst these, 6 crore households are in
essential to analyze the savings rates amongst rural the former group (Range II) and around 1.5 crore in the
households. Table 5.1 demonstrates that while rural latter (Range III). The number of investing households
in rural India is significantly lower than these numbers.
Table 5.1: Total Savings of Household as Percentage of Annual Income
Total Savings as Percentage of Annual Income

Range I < 40% of Annual Income 9427 68.8%
Range II 40%–60% of Annual Income 3293 24.0%
Range III > 60% of Annual Income 977 7.1%
Figure 5.4 shows that not only do nearly 40 percent areas are significantly lower than in urban India, which
of respondents have an income higher than Rs.20,000 significantly increases the potential for capital formation
per month, 14 percent of these are in the greater and investments in rural high and middle-income groups.
than 1 lakh per month income slab. Additionally, it is The fact that there are a negligible amount of securities
crucial to remember that baseline expenses in rural markets investors even among these households displays
a singular lack of awareness and dearth of outreach.

60
Figure 5.4: Income Distribution of Rural Survey Respondents
Above ` 1 Lakh
1,851
` 50,000–1 lakh Below `20,000
1,907
Below ` 20,000 `20,000–50,000

` 20,000–50,000
1,527 8,412
`50,000–1 lakh
Above `1 Lakh
Analyzing the savings and income data further, it is In the urban households chapter (Chapter 4), the
seen that 31 percent of the above one lakh income SIS established a clear linear relationship between
households and 28 percent of the `50,000 - `1,00,000 education and investments (Figure 4.5). Education not
income households have total savings that are more than only has a direct linear relationship with investing and
40 percent of their annual household income. Keeping savings but an even stronger one with income levels.
in mind the 22 crore rural households population, the As Figure 5.5 shows, the right skew in the income data
SIS estimates that about 1.5 to 1.8 crore households has also significantly affected the education levels of the
(controlling for the survey design) possess income survey respondents. While the current Indian national
and savings rates that will undoubtedly allow them to literacy is 74 percent, the literacy rate of the SIS 2015
invest in market-related instruments. However, even survey respondents is 89 percent (which is closer to
among these high-income, high-savings households, the youth literacy rate of 90.2 percent). According to
investment rates are insignificant and hover around the the survey data, 25 percent of urban respondents with
rural average of 0.23 percent. more than 15 years of education invest in the securities
markets whereas in more educated rural households,
this percentage remains equivalent to the national rural
average of 0.23 percent.

61
Figure 5.5: Education Levels amongst Rural Respondents
> 15 years 2,102
11–15 yea rs 3,247
8–10 yea rs 3,878
1–7 yea rs 2,939
Not Literate 1,531
0 500 1000 1500 2000 2500 3000 3500 4000 4500
While it is surprising that investment levels are low divide regarding financial awareness. The significance
even amongst the educated and high-income groups of these differences have to be noted and outreach
of rural India who also have significantly high savings from the government and regulators defined, to create
rate, it distinctly highlights the strong urban-rural awareness and thus, a higher level of financial inclusion
that extends beyond basic banking operations.

06 PUBLIC OFFERINGS (IPOs)
62
INVESTORS RESPONSE TO INITIAL
KEY FINDINGS
è While 15 percent of survey participants are investors, just 18 percent

of these have invested in IPOs. Thus, a mere 3 percent of all survey
participants have invested in IPOs.
è Over 72 percent of regular IPO investors find the IPO process challenging.
è The book building process, the time taken for allocation and the handing
over of cheques are the most critical roadblocks. Each of these issues
has been acted upon by SEBI over the past year.
è The median IPO investor participates in one IPO per year.
è Despite the large-scale closure of brokerages (detailed in Chapter 8),

financial intermediaries play a key role in IPO information dissemination.
è Stockbrokers are the largest supplier of IPO application forms.
è Notwithstanding the increasing role of the Internet; newspapers and

television remain the top two sources of IPO-related news.
è Indian investors demonstrate an intuitive wisdom by investing in IPOs

for an optimal holding period.

63
Chapter Rationale
Reflecting the broader sentiments of the global credit those who do, the investment frequency is just one IPO
markets, the IPO markets in India have gone through per year. From the SIS data, we can extrapolate that a
a roller coaster ride in the past decade and are slowly reliance on traditional sources of information and advice
recovering after a lull of over four years. However, (i.e., brokerages and newspapers) despite the large-scale
according to the 2015 SIS data, most Indian investors closure of brokerages and the Internet’s appropriation
perceive the IPO investment processes of book building of information is affecting IPO growth. In spite of these
and cheque clearance together with the protracted time impediments, Indian investors demonstrate an intuitive
spent on the entire process from application to allotment wisdom by usually investing in IPOs for a holding period
to be complicated and cumbersome. Consequently, less that is less than three years. As Figure 6.1 demonstrates,
than 20 percent of investors, which is close to 3 percent empirically, Indian IPOs have persistently outperformed
of those surveyed-participate in IPOs and even amongst broader indices in the initial two to three year period.
Figure 6.1 – Comparative Performances: S&P BSE IPO Index and S&P BSE Sensex48
210
160
110
60
S&P BSE IPO S&P BSE SENSEX (TR)
Source: Bloomberg
48. S&P Dow Jones Indices, S&P BSE IPO Index and S&P BSE Sensex, last accessed March 10, 2016,
http://us.spindices.com/indices/equity/sp- bse-ipo
64
Introduction
In an initial public offering (colloquially referred to as With rising entrepreneurship in India and an emergent
“going public”), private companies sell their shares in start-up ecosystem, a strong IPO market allows venture
securities exchanges to raise capital and thus, transform capitalists and early stage investors to be at ease with
into public companies listed in the stock markets. IPOs their investments. Weaker market sentiments do not
allow businesses to raise funds for expansion and allow new shares to be priced at optimal valuations,
the broader retail investor community to participate leading to fall in IPO volumes; thus, as a barometer of
in a firm’s growth. Unlike a debt or a loan, which are investor sentiment, new public issues—either as Initial
financial obligations for the company, the money raised Public Offerings (IPO) of equities or New Fund Offerings
through an IPO is equity capital in a company, which (NFO) of mutual funds—are a key area of interest for
reduces a company’s leverage and improves its balance SEBI. These primary markets that provide liquidity
sheets. Common shares do not have declared interest to corporations and are the key to understanding
rates and consequently, IPOs tend to allow companies to investor sentiment are crucial for a smooth functioning
reduce their WACC (Weighted Average Cost of Capital). economy49.
Indian IPO Markets

Reflecting the broader sentiments of the global credit the trend in IPO issuance since FY 2003-04, by volume.
markets, the IPO markets in India have gone through a The sharp global economic growth and the subsequent
roller coaster ride in the past decade. Figure 6.2 shows GFC are also echoed in this data50.
49. NASSCOM and Zinnov, Startup India – Momentous Rise of the Indian Start-up Ecosystem (New Delhi: NASSCOM, 2015), last accessed March 17, 2016,
http://www.nasscom.in/startup-india-%E2%80%93-momentous-rise-indian-startup-ecosystem
50. Prime Database, Prime IPO database, last accessed December 31, 2015,
http://www.primedatabase.com/
65
Figure 6.2: IPO Volumes in India since 2003–04 (` crore)
45,000
41,323
33,098
30,000
24,948
23,706
14,662
15,000
10,798
9,632
5,893 6,497
3,191 3,019
2,034 1,205
0
Source: SEBI Data in 2015-16 is till November 2015
While the 2003-04 data continues to reflect the after market showed a surprising resilience by inching closer
effects of the 2001 dotcom crisis, the IPO markets in to its 2007-08 peaks. Nonetheless, between 2011 and
India grew sharply during the 2005 to 2008 period. The 2015, the GFC’s prolonged, spillover effects impeded
sharp drop in 2008-09 mirrors the freeze in the global the growth of the Indian markets. The total IPO volume
credit markets whereas between 2009 and 2011, India was a meager `16,614 crore – significantly lower than
(and some larger emerging markets) seemed immune to the FY 2010-11 total IPO volume of `33,097 crore.
the broader crisis in the developed markets. In 2010-11, However, the current fiscal year’s data look promising
low interest rates and negative equity market returns in again. Optimism about the new government’s policy
developed countries encouraged both local and foreign developments, improving global economy and credit
funds to invest heavily in the Indian markets and the IPO market conditions have resulted in 220 percent increase
in IPO volumes by November 30th, 2015.

66
Interest in IPO amongst Investors

A small percentage of the Indian investors participate markets. However, according to the SIS data, over 73
in the IPO process and this community has never been percent of the surveyed regular IPO investors perceive
analyzed in detail51. According to the 2015 SIS data, the IPO investment processes of book building and
while 15 percent of survey participants are investors cheque clearances together with the protracted time
and out of these, 18 percent have invested in IPOs, just spent on the entire process from application to allotment
17 percent of investors consistently participate in IPOs. to be complicated and cumbersome. As detailed in
Thus, a mere 3 percent of all survey participants have Figure 6.3, investors are not only ambiguous about the
invested in IPOs. The SIS data shows that among survey process of book building and have significant concerns
participants, 948 out of a total 5,356 investors regularly with the long-drawn-out time the process demands,
invest in IPOs and 957 have participated in the IPO they are also apprehensive about specific tasks like the
process at least once. On an average, the median IPO handing over of physical cheques to unknown persons
investor invests in one IPO per year. and the inaccessibility of forms. Surprisingly, the SIS data
confirms that although nearly 84 percent of regular IPO
While it is undeniable that Indian IPOs have expanded investors and 25 percent of all investors are aware that
phenomenally in 2015 with an IPO growth rate higher forms and prospectus are available online; yet, despite
than any other large market, it is also true that the rising urban Internet penetration, there seems to be
market baseline is much lower than that of China or little ‘faith’ in using the Internet for matters related to
other developed markets52. Since primary market is a IPO investments. It should be noted here that over the
direct source of liquidity for companies and also act as a past year, during the course of the writing of this report,
barometer for credit flows in the broader economy, it is SEBI has made significant changes in the IPO process and
vital that the regulators ensure the accessibility of these has already addressed many areas that caused concern
amongst SIS 2015 participants.
51. Amey Pramodkumar Kansara, “Where are India’s Retail Investors?”, The Market Mogul, December 15, 2015, last accessed December 30, 2015,
http://themarketmogul.com/indias-retail-investors/
52. Ernst and Young, EY Global IPO Trends 2015 4Q, (New York: EY, 2015), last accessed March 17, 2016,
http://www.ey.com/Publication/vwLUAssets/EY-global-ipo-trends-2015-q4/$FILE/EY-global-ipo-trends-2015-q4.pdf
67
Figure 6.3 – Difficulties of Investing in IPOs
400
355
342
323
300
255
241
200 178
111
100
0
Time Taken Handing over Unclear Book Forms Complicated Difficult No/low
Cheques Building Inaccessible Form Instructions allotment
N=948 (regular IPO investors, SIS 2015)
A deeper analysis of the SIS data can lead to the inference According to the SIS data, although new media and
that a reliance on traditional sources of information television are relevant for information dissemination,
and advice (i.e., brokerages and newspapers) despite newspaper advertisements still remain the most
the large-scale closure of brokerages and the Internet’s popular source of information. In comparison, a mere
appropriation of information is possibly hampering one third of investors rely on the Internet while two
the growth of the IPO markets. A close examination of third of investors depend on the television. Keeping this
information accessibility and the difficulties associated analysis in mind, outreach efforts to popularize primary
with the application process provide clarity on markets investments should be optimized. Additionally,
approaches to help expand IPO market participation as Figure 6.4 clearly illustrates, while a retail investor’s
rate. personal contacts are an important information source,
with 59 percent of investors depending on brokers, it is
still the brokerage business that is the primary source of
information on IPOs.
68
Figure 6.4 – IPOs: Information Sources
Internet Sources 168
Television 227
Brokerage Firm 322
Application Form 397
Friend/Relative 439
Newspaper Advertisements 503
Advice of broker 558
0 100 200 300 400 500 600
A close analysis of the process by which IPO application Figure 6.5 ratifies that online sources of application
forms are sourced and distributed underlines the forms are amongst the least prevalent access points
significance of the financial intermediaries. To encourage and it is the brick and mortar sources that are the most
transparency and accessibility, online applications of IPO widespread. Currently, online forms are used half as
forms have recently been encouraged, and yet, the SIS frequently as street vendors and virtually every applicant
data confirms that stockbrokers still tenaciously endure sources the application forms either directly from their
as the primary source of these forms to most investors. broker or from the “registrar of the issue”, or through
various collection centers.
53. SEBI, Frequently Asked Questions on Application Supported by Block Amount (ASBA) Facility, Mumbai: SEBI, last accessed March 17, 2016,
http://www.sebi.gov.in/faq/asbaprocess.pdf
69
Figure 6.5 – IPO Application Forms: Sources
Banks 115
Online 188
Merchant Bankers 246
Register to an Issue 313
Street Vendors 326
Collection Centres 413
Stock Brokers 638
0 100 200 300 400 500 600 700
As the SIS 2015 data has previously established, the tend to focus more on company’s history as opposed to
stockbroker community very closely supports the initial current risk factors, balance sheet strength and growth
step towards applying for an IPO – the application potential (as Figure 6.6 points out) are thus the broker’s
form. Nonetheless, when questioned closely about the inherent biases54—rather than the investor’s personal
prospectus and its specific sections, although almost all assessment of the new issue—may strongly affect the
the IPO applicants affirmed that they had reviewed the decision-making process.
prospectus, and yet, almost half were unable to recall its
sections accurately. This hesitancy may signal that the According to the US Securities and Exchange
investors depend primarily on their brokers, not only for Commission, “This year’s top-performing mutual
the physical copy of the form but also for interpretation funds aren’t necessarily going to be next year’s best
and dissemination of the essential information contained performers. It’s not uncommon for a fund to have better-
in the prospectus itself. Disturbingly, since investors than-average performance one year and mediocre or
54. Refer to Chapter 8 for detailed data and analysis regarding investor-broker relationships
70
below-average performance the following year. That’s in India, in their retrograde focus, investors ignore the
why the SEC requires funds to tell investors that a ubiquitous regulatory caution that past performance is
fund’s past performance does not necessarily predict not necessarily a prediction of future outcome. Arguably
future results” . Notwithstanding similar disclaimers
55
the easiest heuristic to utilize, investors expect future
performance to exactly mirror past successes/failures.
Figure 6.6 – Part of Prospectus read by IPO Investors
Objects of the Issue 79
Offer Information 210
IPO Grading 332
Promoters 369
Legal Information 406
Risk Factors 419
Financials 451
Projects 462
Company History 585
0 100 200 300 400 500 600 700
According to the SIS 2015 survey, in case of grievances regulators and exchanges that is essential for market
in the IPO process, investors commonly contact functioning while, yet again, lays emphasis on the role
their brokers (22 percent) whilst about 9 percent go of the financial intermediaries in the urban Indian
unreported. The data shows that investors also tend to context. In spite of the impediments discussed above,
reach out to SEBI (22 percent) and the Stock Exchanges the SIS data confirms that Indian investors demonstrate
(18 percent) and just 13 percent of grievances get to an intuitive wisdom by investing in IPOs for a holding
the company directly. This showcases a faith in the period that is less than three years. Table 6.1 showcases
55. Securities and Exchange Commission, Fast Answers: Mutual Funds, Past Performance, July 28, 2010, Washington DC: SEC, last accessed March 26, 2016,
https://www.sec.gov/answers/mperf.htm
71
the varied holding periods of IPOs and highlights the from IPOs slowly dissipate57. With more than 60 percent
different timelines of investors – in primary markets. of IPO investors exiting their investments in less than
Academic research in finance proves that globally, IPOs one year and more than 90 percent exiting within three
outperform the broader indices in short-term returns . 56
years, Indian investors demonstrate an intuitive wisdom
In the Indian context, an investment horizon of two by investing in IPOs for a holding period that is less than
years is optimal and beyond that, the excess returns three years.
Table 6.1 – Holding Period of Equities Purchased through the IPO Process
Holding Period Frequency Percent Cumulative

< 6 Months 226 23.6% 23.6%
6–12 Months 353 36.9% 60.6%
1–3 Years 316 33.1% 93.6%
> 3 Years 61 6.4% 100.0%
Total 956 100.0%
N=956 (IPO investors, SIS 2015)
56. The seminal paper is Ritter, Jay R, “The Long-Run Performance of Initial Public Offerings”, The Journal of Finance 46,
no. 1 (1991): 3–27
57. Seshadev Sahoo and Prabina Rajib, “After Market Pricing Performance of Initial Public Offerings (IPOs): Indian IPO Market 2002–2006”,
Vikalpa, 35, no. 4 (2010): 27
07 AND INVESTMENT PATTERNS
72
MUTUAL FUNDS: INVESTOR BEHAVIOUR
KEY FINDINGS
è Of the SIS 2015 data’s total investor base, 66 percent (or 3,536) have
invested in mutual funds (MF), making it the most popular investment
instrument amongst Indian investors.
è Among the 3,536 mutual fund investors, 1,494 are regular MF investors.
è Like other securities markets information sources, MF investors also

find out about new offerings or existing mutual funds primarily through
newspapers (56 percent).
è Although most investors (88 percent) are aware that MFs can be bought
online, the Internet is neither a primary soruce of information for MFs
(only 24 percent use it) nor it is a primary method of investing in MFs.
Additionally, 24 percent of investors use exchanges and exchange
plaforms to invest in MFs.
è Traditional means of investing like using MF distributors, collection

centres or investing directly through the MF remain the most popular.
è With nearly 60 percent of regular MF investors using SIPs to invest in

MFs, the recent popularity of SIPs is palpable.
è Although 58 percent claim that they will hold on to their MF investments

in times of market volatility, less than a quarter of investors continue
with their MF investments beyond a three-year period.
è Almost all MF investors look through the SID - Scheme Information

Document. Risk Factors (68 percent) and Scheme Highlights (51
percent) are the most widely read while a mere 31 percent read through
the Past Performance details.
è The primary problem in the MF investment process is the non-

accessibility of forms (35 percent).
è In cases of grievance, most investors reach out to SEBI (64 percent).

73
Chapter Rationale
Mutual funds, the most popular investment instrument and collection centres or investing directly through the
amongst Indian investors, are diversified financial fund itself, mutual fund investors continue to follow
instruments that provide high quality, long-term, risk- traditional paths of investment. In fact, 35 percent of
adjusted returns for retail investors. Although investors investors believe that the primary problem in the MF
seem to have realized that these funds help optimize investment process is the non-accessibility of forms and
their portfolio (66 percent of investors have invested in yet, 88 percent are aware that the entire MF investment
it) yet a holistic overview of the population that includes process is available online. However, with nearly 60
all investors and non-investors shows that a meagre 10 percent of regular MF investors using Systematic
percent of urban respondents have invested in mutual Investment Plans (SIPs) to invest in MFs, it seems that
funds. Additionally, although most mutual fund investors the modern day, automated investment process has
claim that they will hold on to their investments in times resonated with the investors. Furthermore, almost all
of market volatility, in reality, less than 1 percent of MF investors look through the Scheme Information
investors continue with that particular MF investment Document (SID) with Risk Factors (68 percent) and
beyond a three-year period. Scheme Highlights (51 percent) being the most widely
read while a mere 31 percent read through the Past
Whether it is in acquiring information from conventional Performance details. MF investors appear savvy enough
sources like newspapers (and not the Internet) or in to realize that past performance of a fund is not a
using old-style methods for investing like MF distributors guarantee of future success.
Introduction
The US Securities and Exchange Commission’s guide Diversification, Affordability and Liquidity58. Among
for mutual fund investors enumerates four advantages these, diversification offers a crucial and straightforward
of investing in MFs: Professional Management, advantage to a household’s portfolio. Unlike a single
58. Securities and Exchange Commission, Office of Investor Education and Advocacy, “Mutual Funds: A Guide for Investors”, 2010, last accessed March 30, 2016,
https://investor.gov/sites/default/files/mutual-funds.pdf
74
security/asset portfolio, a portfolio with assets or in the mutual fund (MF) industry has shot up since
securities that have limited correlation to each other can liberalization of that market. The Indian MF industry has
lead to higher returns but lower risk59. Mutual fund unit significantly changed since private sector funds were
holders can participate in multiple underlying assets allowed to enter the market in 1993. In 2002, the 1963
(stocks, bonds or even commodities) whose returns UTI Act was repealed. From February 2003, the market
are not fully correlated, and thus, provide higher risk- as a whole moved to the next level. The AUM has grown
adjusted returns60. It is encouraging that these benefits nearly 12 times since then61 – an increase of 280 percent
have been realized by retail investors and investments in the next 10 years.
Figure 7.1: Assets under Management of the Indian Mutual Fund Industry (in `Crore)
1,200,000
1,000,000
800,000
600,000
400,000
200,000
Source: Association of Mutual Funds in India (AMFI)
The SIS 2015 data confirms that the MF industry has investment vehicle among the survey respondents with
grown sharply and that MFs are the most popular 66 percent of investors participating in that market.
59. Harry Markowitz, “Portfolio Selection”, The Journal of Finance, Vol. 7, No. 1, March 1952, pp. 77–91
60. Harry Markowitz, the father of modern portfolio theory, first investigated portfolio diversification benefits (for which he received the Nobel Prize in Economics)
in 1990. His Nobel lecture is available at: http://www.nobelprize.org/nobel_prizes/economic- sciences/laureates/1990/markowitz-lecture.pdf, last accessed
December 30, 2015
61.Association of Mutual Funds in India, “Mutual Fund History”, last accessed January 9, 2016,
https://www.amfiindia.com/research- information/mf-history
75
Indian investors certainly seemed to have realized that all investors and non-investors shows that a meagre 10
these funds help optimize their portfolio. However, an percent of the entire urban surveyed pool invests in MFs
all-inclusive overview of the population that includes (Figure 7.2).
Figure 7.2: Mutual Fund Investors as a Proportion of Total Respondents
40,000
36,756
30,000
20,000
10,000
5,356
3,536
1,494
-
Respondents Investors Mutual Fund Investors Regular MF Investors
Source: SIS 2015
According to the SIS 2015, 58 percent of regular MF MFs for more than 3 years whereas more than half of
investors affirm that they will continue to remain them (57 percent) invest for less than a year. This is
invested in MFs during times of market volatility. Since analogous to the AMFI data62 that shows that 47 percent
short-term price movements are not representative of of MF investors stay invested in the same scheme for
the longer-term holding period returns of a MF, this less than a year while 36 percent invest for holding
is certainly an astute decision. However, according to periods longer than 3 years. Since benefits of equity or
Table 7.1, just 22 percent of investors hold on to their mutual funds holdings are especially realized when held
62. Association of Mutual Funds in India, Folio and Ticket Size, June 2015, last accessed November 6, 2015,
https://www.amfiindia.com/Themes/Theme1/downloads/home/folio-and-ticket-size.pdf
76
in the long run, this quick turnover of MF investments when investors engage in profit making too quickly or
indicates an obvious sign of investor impatience – i.e., offload their investments too early due to downward
market trends.
Table 7.1: Holding Duration of Mutual Funds
MF Holding Duration Percentage Cumulative

< 6 Months 38.0% 38.0%
6–12 months 19.0% 57.0%
1–3 Years 21.0% 78.0%
> 3 Years 22.0% 100.0%
N=1,494 (all urban, regular MF investors, SIS 2015)
Information Sources
While Internet penetration is increasing in India (10 the rising Internet penetration in India and the large
percent of the population from December, 2011 to television audiences in the country, information flow
35 percent of the population in March, 2016)63, it has concerning mutual funds and new fund offerings are
remained a young person’s domain with 75 percent of still controlled by traditional news sources. According to
Internet users below the age of 34, 16 percent of users the SIS 2015 data (see Figure 7.3), although 55 percent
in the 35-44 years range, and only 9 percent users over of investors acquire information concerning MFs from
the age of 4564. Since Indian investors tend to be older newspapers, a mere 24 percent use the Internet to
(average age of surveyed investors is 41 years), despite receive information while an equal percentage procures
this information from the television.
63. Internet Live Stats, Internet Users by Country (2016), last accessed March 23, 2016,
http://www.internetlivestats.com/internet-users-by-country/
64. Statista, Distribution of Internet Users in India as of September 2013, by Age Group, last accessed March 20, 2016,
77
Figure 7.3: Information Sources about Mutual Funds
900 829
713 704 691
592
600
507
362 359
300
As discussed in Chapters 4 and 6, this pattern of Internet Indian markets have not yet seen the confidence-
equivocation for investment matters stems from a building measures taken by financial intermediaries in
variety of reasons like age and investor awareness while developed countries (through identity theft protection
cyber security maybe an important concern too. SEBI guarantees)68.
(as a member of IOSCO) has adopted the “Principles
for Financial Market Infrastructures (PFMIs) laid down Whether it is acquiring information from conventional
by CPMI-IOSCO” on cyber security65, there have been sources like newspapers, or in using old-style methods
no reports of hacking of Indian trading accounts and for investing like MF distributors and collection centres,
the Indian customers are certainly becoming more or investing directly through the fund itself, mutual
comfortable with e-commerce , and yet, purchasing
66
fund investments continue to follow traditional paths of
financial products online is evidently still not popular67. investment. The influence of financial intermediaries and
65. SEBI, Circular: Cyber Security and Cyber Resilience Framework of Stock Exchanges, Clearing Corporation and Depositories, July 6, 2015, last accessed January
11, 2016, http://www.sebi.gov.in/cms/sebi_data/attachdocs/1436179654531.pdf
66. Statista, Digital Buyer Penetration in India from 2011 to 2018, last accessed April 9, 2016,
http://www.statista.com/statistics/261664/digital- buyer-penetration-in-india/
67. Fidelity Customer Protection Guarantee, last accessed February 9, 2016,
https://www.fidelity.com/security/overview
68. Scottrade, Secure Online Investing & Identity Theft Protection, last accessed February 9, 2016,
https://www.scottrade.com/online-
78
word of mouth marketing are also extremely important corresponding lack of internet savviness and yet, most
in this market. The SIS data confirms that 48 percent of (88 percent) are aware that MFs can be purchased
investors gather information regarding mutual funds that online (and thus, the MF details and application forms
are available in the market from friends and family while are available on the internet).
47 percent rely on MF distributors for this information. However, change is imminent in the industry and ease
See Chapter 4 for similar discussions on broader of use will usher in the direction of online securities
investment markets and Chapter 6 on IPOs that details markets. The easy investment plans available using SIPs
in what way the investment markets are dependent is arguably a harbinger of that change. While the SIS
on traditional media and financial intermediaries for 2015 data finds low Internet usage for trading stocks,
information and application forms. Although regular MF MFs (see Figure 7.4) and IPOs, nearly 60 percent of
investors who were surveyed in this section, also display regular MF investors are using SIPs to invest in MFs.
Figure 7.4: Mutual Funds Investment Channels
1200
996
890
900
623
600
354
300
0
MF Distributors Directly through the MF Collection Centres Exchanges and Platforms

79
While investors are not always rational in their information seem to understand the risk benefits of investing in
sourcing (as seen above) or financial decision-making MFs. This risk-averse rationality is also reflected in the
(as seen in Chapter 9), most MF investors read the SIS data, which shows that 31 percent of investors read
relevant sections of the SID (Figure 7.5). 68 percent of about the Past Performance of the relevant funds. Savvy
respondents read through the Risk Factors in the SID investors who appear to be aware of risk metrics and
while 51 percent study the Scheme Highlights – the scheme details while taking their investment decisions
two primary sections that contain most of the valuable are also aware of the often-repeated warning that past
information for the retail investor. Regular MF investors performance is not a guarantee of future results.
Figure 7.5: Parts of SID read by Investors
Penalties and Pending Litigations 132
Fees & Expense 268
Periodic Disclosures 443
Scheme Performance 464
Investment Restrictions 487
Details of Fund Manager 532
Asset Allocation Pattern 542
Investment Objective and Strategy 562
Highlights of the Scheme 754
Risk Factors 1011
0 300 600 900 1200
As Chapter 4 underlines in detail, most investors reach its outreach efforts have had a positive impact on the
out to SEBI for any markets-related grievances. This investor population. Similarly, in cases of complaints
substantiates the fact that SEBI is recognized as the concerning mutual funds, 64 percent of investors
primary regulator of the securities markets and that register their grievances with SEBI, which is significantly

80
more than those who reach out to their brokers (54 at all and thus, relevant industry bodies and regulatory
percent), the MF distributors (47 percent) or the MFs institutions should try and ensure that a more robust
themselves (46 percent). However, the SIS data shows outreach program addresses and resolves all complaints
that about 12 percent of the grievances are not reported (see Figure 7.6).
Figure 7.6: Grievance Registration Amongst Mutual Fund Investors
Did not report Grievances 12.4%
MFs 45.6%
MF Distributor / Advisor 47.4%
Brokers 54.4%
SEBI 63.9%
0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0%
Mutual funds are the most popular investment vehicle and challenges with this market. It is clear from the SIS
for Indian investors and that is indeed good news 2015 data that the awareness programs in this area of
for SEBI as these instruments provide significant risk securities market has truly had a significant effect in
reduction benefits due to diversification. This section the past decade with investors acting rationally in many
was a detailed questionnaire for those investors who aspects of the market, except arguably holding their
regularly participate in the MF market to understand investments for a shorter period than necessary to truly
their reasons for participation and also their problems gain from the long term growth of the securities market.

08 PARTICIPANTS
81
INVESTORS AND MARKET
KEY FINDINGS
è The investor base in India is increasing; nearly 75 percent of the

investors in SIS 2015 participated in the securities markets for the first
time within the last five years.
è Although retail participation is rising, most retail investors trade either

weekly or monthly and institutional algorithmic trading (computerized,
automated trading) accounts for an increasing percentage of trades in
the exchanges.

è Limited retail trading frequency, rising Internet penetration and a surge
in the number of Authorized Persons (AP) is significantly altering the
traditional dynamics of the brokerage industry. Smaller brokers are
either disappearing or are merging to form larger and more stable
consolidations.
è Despite a growing dependence on online technology in India, a mere

22 percent of investors use the Internet to place their trades while a
staggering 78 percent continue to ‘call in’ their trades.
è While most investors do not trade online due to a lack of awareness

about the procedures related to online trading systems, there is
significant technology aversion and inertia as well.
è Demonstrating a reliance on brokers and sub-brokers, more than 70

percent of investors depend on financial planners and maintain running
accounts/standing orders with their brokers.
è SIS 2015 concludes that it is the Indian investor’s emphasis on service

quality and financial reliability (rather than brokerage charges or
physical proximity) that is instigating the smaller brokers to consolidate
into larger, more robust establishments.
è Although 90 percent of investors are aware that this is not a mandated

ruling, 66 percent provide their financial intermediaries with a Power
of Attorney (PoA).
è Despite a strong relationship with the broker, retail investors continue to

primarily trust their own judgment when making investment decisions.

82
Chapter Rationale
The investor base in India is increasing; the SIS survey on financial planners and maintain running accounts/
finds that within the last five years, nearly 75 percent standing orders with their brokers. While it is true that
of investors have participated in the securities markets the Indian brokerage industry’s traditional structure
for the first time. Nonetheless, rising volumes in the is also shifting, the survey seems to conclude that it is
stock market are primarily being driven by institutional not the Internet but the Indian investor’s emphasis on
algorithmic trading (computerized automated trading) service quality and financial reliability that is instigating
and not by retail investors who mostly trade either the smaller brokers to consolidate into larger, more
weekly or monthly. Limited retail trading frequency, robust establishments. Since it is established reputation
rising Internet penetration and a surge in the number and financial soundness (rather than brokerage charges
of Authorized Persons (AP) is critically affecting the or physical proximity) that the Indian investor focuses
brokerage industry. The traditional dynamics of the on while choosing a financial intermediary, these larger
industry are changing since smaller brokers are either firms are becoming more powerful and influential in the
disappearing or merging to form larger and more stable brokerage business. Underscoring the strong relationship
consolidations. However, despite a growing dependence with their brokers, the SIS data depicts that 66 percent of
on online technology in India, according to the SIS data, investors provide their financial intermediaries with the
only 22 percent of investors use the Internet to place their power of attorney, and yet, the data also unexpectedly
trades while a staggering 78 percent continue to ‘call in’ ascertains that retail investors still primarily trusts their
their trades. Underlining their reliance on brokers and own selves—and not their brokers—for investment
sub-brokers, more than 70 percent of investors depend decision-making.
Introduction
The Global Financial Crisis (GFC) left a strong mark on savings and capital formation instruments like gold,
the psyche of the individual investors. Retail investors commodities and even bank deposits. However, US
shied away from the securities markets to invest in safer investors (the world’s largest securities market) increased

83
their exposure to securities by over 25 percent in the five brokerage business. A close analysis of long-term trend
years between 2010 and 2014 and by the end of 2014, data underlines the Internet’s effect on US brokerage
a positive change in sentiment was palpable across the houses: from 19.4 million (18.2 percent) households
globe. In spite of the rising rate of investment in financial with brokerage accounts in 2001 to 17.2 million (14
instruments, the total number of US households with percent) household with brokerage accounts in 201469.
brokerage accounts decreased during the same period. Similarly, although the penetration of securities markets
Technological advances are rapidly changing the global is increasing in India, a large number of brokerage
houses are closing down.
Trading Patterns
The investor base in India is gradually expanding. the entire pool of investors in this survey. Most of the
According to the SIS survey, nearly 75 percent of investors have been investing in the markets for less
investors have participated in the securities markets than 5 years; however, the data also show a sizeable
for the first time within the last five years. Table 8.1 number of investors who have been investing for 6 to 10
showcases the data of 4,305 investors, which is roughly, years and a smaller sample of investors in the 15+ years
of experience in the markets.
Table 8.1 – Number of Years Participating in the Securities Markets
Years in the Market Frequency Percentage Cumulative

1 to 5 3100 74.8% 74.8%
6 to 10 1047 21.6% 96.4%
11 to 15 125 2.7% 99.1%
16 to 20 23 0.3% 99.4%
20+ 10 0.6% 100.0%
N=4,305 (subset of urban investors who responded, SIS 2015)
69. Constantijn W. A. Panis and Michael Brien, Brokerage Accounts in the United States, November 30, 2015, Advanced Analytical Consulting Group and Deloitte,
last accessed 20 March, 2016,
https://www.dol.gov/ebsa/pdf/brokerageaccountsintheus.pdf
84
As on 31st March 2015, algorithmic trading trading once a week, another 30 percent of investors
(computerized automated rules based trading, largely trading once a month, and only 6 percent trading every
used by institutions) accounted for more than 40 day. This is definitely desirable for policy makers (though
percent of all trades in the Indian stock exchanges, and not necessarily brokers) since excess trading in the retail
thus, encompassed a significant portion of the rising market leads to high transaction costs and thus, lower
volumes. While many retail traders have day-traded returns for the small investor.
during their time in the markets (about 40 percent),
most investors do not trade as often. The distribution of
trading frequency is multimodal with about 30 percent
Figure 8.1 – Trading Frequency amongst Investors
30.0% 28.3% 28.6%
20.0%
11.4%
9.9%
10.0%
6.6%
5.6% 5.3%
4.2%
0.0%
Daily Once in Two Weekly Fortnightly Monthly Once in Six Yearly Infrequently
Days Months
N=5,356 (all urban investors, SIS 2015)

85
Table 8.2 tabulates the frequency with which investors month, a little over 50 percent track the markets at least
follow the market and shows, surprisingly, that despite once a week. This equivalence remains pretty robust
the very low number of investors who trade daily, 18 over longer time periods as well, leading to the obvious
percent of investors follow the market everyday. At conclusion that investors who trade more frequently
par with the 44 percent who trade more than once a tend to follow the markets more regularly.
Table 8.2 – Investors’ Market Movements Tracking Frequency
Follow Market Movement Frequency Percentage Cumulative

Daily 990 18.4% 18.4%
Once in Two Days 516 9.6% 28.0%
Weekly 1318 24.5% 52.5%
Fortnightly 197 3.7% 56.2%
Monthly 1082 20.1% 76.3%
Once in Six Months 425 7.9% 84.2%
Yearly 726 13.5% 97.7%
Infrequently or Never 123 2.3% 100.0%
Financial Intermediaries in India

In India over the past decade, brokers and market 2015, in Indian markets there were a total of 6,147 cash
participants continue to play a large role in securities segment brokers, a drop of 35 percent from the previous
markets functions. Contrary to the Indian trend the year’s number of 9,411 (at the end of FY 2011-12, this
global investors are moving to online trading and was 10,268)71. The number of sub-brokers fell by 18
investments70. According to SEBI’s data, as of 31st March percent from 51,885 at the end of FY 2014 to 42,351
70. Andre Cappon, “The Brokerage World Is Changing, Who Will Survive?”, Forbes, April 16, 2014, last accessed January 15, 2016,
http://www.forbes.com/sites/advisor/2014/04/16/the-brokerage-world-is-changing-who-will-survive/
71. SEBI, SEBI Bulletin April 2015, last accessed February 15, 2016,
http://www.sebi.gov.in/cms/sebi_data/attachdocs/1430125406381.pdf
86
at the end of FY 2015 (at the end of FY 2012, this was 35 percent of the population in March 2016)76, it has
77,141). In April 2015, the first month of FY 2015-2016, remained a young person’s domain with 75 percent
the number astoundingly dropped to 3,195 brokers of Internet users below the age of 34, 16 percent of
and 41,625 sub-brokers. The derivative sector brokers users in the 35-44 years range, and only 9 percent users
have marginally outperformed the broader industry. over the age of 4577. Since Indian investors tend to be
According to SEBI’s May 2015 Bulletin data, the number older (average age of surveyed investors is 41 years),
of brokers increased from 2,337 in FY 2012 to 3,031 in the continuous drop in the numbers of registered
FY 2014 while in April 2015, the number stands at 2,810 brokers and sub-brokers in India appears not to be a
brokers. The traditional dynamics of the industry are phenomenon that the Internet alone has generated.
shifting as smaller brokers are either disappearing or
are merging to form larger, more stable consolidations72. Even amongst those households, which use the
SEBI’s data on the “Percentage Share of Top ‘N’ Members Internet to receive information about matters related to
in Turnover in Cash Segment” shows that while the top investments, it has not yet become the tool of choice
25 brokers accounted for 38 percent of transactions in for securities markets trading. Amongst the SIS 2015
2008-09, the share has moved up to 51.2 percent in participants, only 22 percent trade online, and yet, nearly
March 2015 . 73
55 percent have traded at least once by using an Internet
When the SIS dug deeper to try and ferret out the exact facility provided by their broker. Additionally, nearly 70
reasons for the drastic drop in the number of brokers, percent of urban investors have accessed exchange
it seemed a wide array of factors—from limited retail websites to gather information concerning ‘terminal
trading frequency and rising Internet penetration to a deactivation of brokers’. However, as Figure 8.2 points
surge in the number of APs and the shutting down of out, it is the ‘lack of awareness’ about the procedures
numerous subnational exchanges over the past year— of online trading that has been the prime deterrent for
are all critically affecting the brokerage industry74. most investors while the ‘lack of technology savviness’
Increasing Internet usage in developed markets has has also played a significant role. Other than ‘sheer
ensured a marked decrease in the usage of brokers and inertia’, which is arguably true for older investors, there
consequently, a sharp squeeze in their fee structures . 75
are also substantial fears regarding the systematic risk
While Internet penetration is increasing in India (10 in online trading, which needs to be allayed by online
percent of the population from December 2011 to brokers and regulators.
72. Ashish Rukhaiyar, “Shares of Larger Brokerages on the Rise”, Mint, May 04, 2015, last accessed March 10, 2016,
73.SEBI, SEBI Bulletin April 2015, last accessed February 15, 2016,
74. Ashley Coutinho, “Brokers Shut Shop on Falling Volumes, Compliance Costs”, Business Standard, January 12, 2016, last accessed January 16, 2016, http://
www.business-standard.com/article/markets/brokers-shut-shop-on-falling-volumes-compliance-costs-116011200755_1.html
75. Constantijn W. A. Panis and Michael Brien, Brokerage Accounts in the United States
76. Internet Live Stats, Internet Users by Country (2016), last accessed January 23, 2016,
http://www.internetlivestats.com/internet-users-by- country/
77. Statista, Distribution of Internet Users in India as of September 2013, by Age Group, last accessed March 20, 2016,
http://www.statista.com/statistics/272394/age-distribution-of-internet-users-in-india/
87
Figure 8.2: Reasons for not Trading Online
2,500
2,196
2,053
2,000 1,864 1,850
1,500
1,000
679
500
0
Lack of Awareness Non tech-savvy Sheer Inertia Systematic risk Accessibility Issues
about Procedure
In 2009, SEBI created a new role in the securities applications of sub-brokers between April to September,
markets—Authorized Persons (AP)—which whilst similar 2013. In the same period, the net addition of APs was
to a sub-broker, yet has significantly lower compliance 15,465”78. Additionally, the shutting down of about 20
requirements. APs simply need to register with the regional exchanges that did not meet the net worth
stock exchanges and not with SEBI. According to SEBI’s and daily turnover criteria set by SEBI affected smaller
data (January 2014), “it approved 13,396 surrender brokers in non-metro cities in FY 2014-1579.
78. Ashish Rukhaiyar, “Shares of Larger Brokerages on the Rise”, Mint, May 04, 2015
79. Sneha Padiyath, “Retail Broker Count Shrinks Further”, Business Standard, June 1, 2015, last accessed March 17, 2016,
http://www.business- standard.com/article/markets/retail-broker-count-shrinks-further-115060101371_1.html
88
Interactions with Financial Intermediary

Despite a growing dependence on online technology of the broker to be crucial, another 45 percent focus
in India, the SIS data finds that a mere 22 percent of on the broker’s image or reputation. The SIS data
investors use the Internet to place their trades while a unambiguously concludes that retail investors are
staggering 78 percent continue to “call in” their trades. particularly quality conscious and are averse to any
Demonstrating a reliance on brokers and sub-brokers, potential counterparty risk when dealing with brokers;
more than 75 percent (3,378) investors maintain a they would rather rely on financial reliability and brand
running account with financial intermediaries, nearly 73 recognition. Given the muted importance assigned to
percent (3,234) investors furnish brokers and depository brokerage charges and physical proximity, the SIS survey
participants with standing instructions for transactions determines that a larger brokerage house with a well-
on their behalf, and about the same number (72 percent known brand and top quality service may outperform
or 3,214 investors) use a financial planner. a local intermediary with lower costs and thus, it may
be the Indian investor’s emphasis on service quality and
To try and understand the symbiotic relationship between financial reliability that is instigating the smaller brokers
investors and financial intermediaries, the SIS survey not to consolidate into larger, more robust establishments.
only closely studies investor behaviour patterns but also Since it is established reputation and financial soundness
meticulously questions investors on their rationale while (rather than brokerage charges or physical proximity)
choosing their financial intermediaries or brokers. Given that the Indian investor focuses on while choosing a
the current state of the industry, this is a vital question financial intermediary, these larger firms are becoming
for the brokerage community and regulators. more powerful and influential in the brokerage business.
The findings closely match the data observed in SEBI
With nearly 70 percent of investors prioritizing the bulletin and the financial press – that smaller brokers
quality of services when determining upon a financial are shutting shop at an alarming pace.
intermediary, Figure 8.3 clearly showcases the decision-
making process of retail investors. Additionally, while Underscoring the strong relationship with their brokers,
50 percent of investors deem the financial soundness over 63 percent of investors provide a Power of Attorney

89
to their financial intermediaries, which allows the the amount of leeway it can potentially provide, and
broker/depository participant to directly debit funds the SIS data confirms that 90 percent of investors are
and securities from their account without their explicit aware that it is not essential to give this right to their
permission. This is indeed a large number considering intermediary.
Figure 8.3 – Reasons for Choosing a Financial Intermediary
Brokerage and Other Charges 16.2%
Physical Proximity 26.4%
Effective Complaint Redressal 36.8%
Image/Reputation 44.7%
Financial Soundness 49.8%
Quality of Services 65.1%
0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0%
Nonetheless, when it is time to trust someone to to over-trading, over confidence and behavioural biases
make an investment decision, more than 40 percent like name recognition. Barber and Odean80 (2000) in
of investors depend on themselves (see Figure 8.4). their paper “Trading Is Hazardous to Your Wealth: The
This is a visible self-confidence bias indication, a much- Common Stock Investment Performance of Individual
documented phenomenon observed in behavioural Investors” note that, “Individual investors who hold
finance where the individual investor makes glaring common stocks directly pay a tremendous performance
mistakes in investments resulting in a loss of wealth due penalty for active trading” and “Overconfidence can
80. Brad M. Barber and Terrance Odean, “Trading Is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors”, Journal of
Finance, April 2000, Volume 5, Issue 2, pp 773–806
90
explain high trading levels and the resulting poor that although the SIS data documents an overwhelming
performance of individual investors.” While we discuss dependence on financial intermediaries, the use of
investor perceptions and biases in chapter 9, it seems financial planners or fund managers are restricted where
it seems to be most essential.
Figure 8.4 – Trust Vis-à-vis Investment Decision-Making
Broker
20.1%
Self
42.5%
Friend/Family
16.2%
Fund Manager
21.2%

09 OF FINANCIAL MARKETS
91
HOUSEHOLD PERCEPTIONS
KEY FINDINGS
è Perceptions of risk, returns and liquidity about investment instruments

are not always in line with their actual risk/return/liquidity profile.
è Return perceptions directly align with past performance data.
è Liquidity perceptions are also closely in line with the actual liquidity of
instruments.
è Due to a lack of awareness about less popular instruments, investors

perceive debentures and bonds to be at a higher risk than mutual funds
and equities.
è When the word ‘risk’ is mentioned, most investors equate it to ‘danger’,

‘loss’, or ‘uncertainty’ while just 16 percent consider it ‘thrilling’ and a
mere 8 percent deem it as an ‘opportunity’.
è Investors worry more about market risks like volatility and financial
losses rather than operational risks like corporate governance issues
and trading on insider information.
è While investors correctly grasp many different aspects of the securities

market like direct risk-return relationship or the market capitalization-
risk correlation, they also reveal certain biases like overconfidence.

92
Chapter Rationale
Alan Greenspan (Governor, US Federal Reserve Bank, the actual risk/return/liquidity profile; often leading
1989 – 2006) famously caused the markets to crash by to expectations mismatch. However, Government of
mentioning the phrase ‘irrational exuberance’ while India (GoI) and SEBI’s successful outreach efforts have
describing the then current situation of the market. increased awareness for certain instruments (like mutual
Behaviour in financial markets can be fairly irrational, funds) and consequently, most investors (66 percent)
which is seen in the rise and fall of equities and indices invest in diversified mutual funds which are safer and
sometimes on the basis of no new information, on more reliable than equities (55 percent). Although the
basis of rumours, or on the basis of information which SIS respondents perceive mutual funds to have lower
might not have any direct or indirect bearing on the risk than equities, perhaps due to a lack of awareness or
value of the stock. This bounded rationality can be seen due to some much-publicized alleged frauds in the retail
in herding behaviour of market participants. Similar bond market81, they consider debentures and bonds
biases can be observed in investment choices. In some riskier than either of these instruments. This may be
cases, real estate markets overheat because the price an effect of the increasing rate of corporate defaults82
rise can be a self-fulfilling prophecy (since everyone in India over the past two years83. Return perceptions,
thinks prices should go up, it does). This causes both on the other hand, directly align with past performance
fundamental valuation and actual prices to diverge. On data: equities are expected to outperform mutual
the other hand, some investment options which might funds, which are, in turn, anticipated to significantly
be optimal for an individual may be ignored completely, outperform bonds. Liquidity perceptions are also closely
either due to ignorance about the instrument or due to in line with the actual liquidity of instruments.
its misplaced risk estimates.
Unsurprisingly, a close study of the risk questionnaire
The SIS data finds that even among households that section shows that risk perceptions are particularly
invest, which include urban, educated and higher income out of line with reality since most investors have a high
clusters, perceptions of risk, returns and liquidity about level of risk aversion. Rather than an opportunity, risk is
investment instruments are not always in line with considered a hazard. Investors seem to be most concerned
81. Securities Exchange Board of India, Public Notice to the Investors of Sahara India Real Estate Corporation Limited and Sahara Housing Investment Corporation
Limited, Mumbai: SEBI, 15 April, 2011, last accessed December 29, 2015,
82. CRISIL Ratings, CRISIL Annual Default and Ratings Transition Study – 2014, Mumbai: CRISIL, August 2014, last accessed December 15, 2015,
https://www.crisil.com/pdf/ratings/crisil-rating-default-study-2014.pdf
83. ONICRA, ONICRA Default Study 2015, Gurgaon: ONICRA, 2016, last accessed March 18, 2016,
http://www.onicra.com/images/pdf/Publications/Onicra-Default-Study-2015.pdf
93
with market risks like volatility, which are inherent risks among Indian investors and they demonstrate an acute
to investing in securities rather than more idiosyncratic understanding in certain facets of finance, which is not
operational risks, which should be the primary cause observed even in developed markets data. For instance,
for apprehension about investing. Since most investors the direct relationship between higher risk and higher
seem to trust their own judgment on investment return seems well understood and complementarily,
decisions, these risks remain ignored, aggravating the that small caps stocks provide the highest returns but
biases inherent in financial decision-making. However, are more risky, while large caps are less risky but have
the representativeness (name recognition) bias is low smaller returns.
Introduction
Perceptions regarding securities markets and investing securities markets84. A seminal book on the topic, Animal
are often not in tandem with reality. This is a key Spirits, is based upon decades of research in the area,
research problem in finance today, and the behavioural is co-authored by two Nobel Laureates in Economics,
(psychological) aspects of the markets are a prime and tries to conclusively prove that sentiments not
focus for academics and policy makers in the field. The only drive markets but also affect macroeconomic
vast research on behavioural economics (for which the variables like inflation, growth, consumption and even
psychologist Daniel Kahneman won the Nobel Memorial interest rates. Economists have found that the prevalent
Prize in Economics) unmistakably demonstrates that sentiment (using Consumer Sentiment survey results)
individual psychology (driven habitually by its biases cause upcoming economic downturns. Thus, policy
and mental shortcuts) primarily drives the growth of makers definitely cannot ignore market sentiments and
perceptions and SIS 2015 is a step in that direction85,86.
84. Daniel Kahneman, “Maps Of Bounded Rationality: A Perspective On Intuitive Judgment And Choice”, Prize Lecture, December 8, 2002, last accessed December
31, 2015,
http://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/2002/kahnemann-lecture.pdf
85.George A. Akerlof and Robert J. Shiller, Animal Spirits: How Human Psychology Drives the Economy and Why It Matters for Global Capitalism, Princeton
University Press, 2009
86. John G. Matsusaka and Argia M. Sbordone, “Consumer Confidence and Economic Fluctuations”, Economic Inquiry, April 1998, Vol. 33, Issue 2, pp. 296–318
94
Risk–Returns–Liquidity Perceptions of Investment Instruments

Although the surveyed investors accurately perceive is limited data on commodity futures or derivatives
mutual funds to have lower risk than equities (Figure (currency or equity), investors seem to ignore the risks
9.1), surprisingly, perhaps due to a lack of awareness, associated with the leverage in these instruments. In
and some much-publicized alleged frauds in the retail spite of a correct directional call, a small drop in the
bond market and the increasing rate of corporate value of a derivative can wipe out the investor’s entire
defaults in India, they consider debentures and bonds equity. This makes derivatives and future significantly
a risker than either of these instruments. While there riskier than ‘plain vanilla’ investment instruments like
bonds or equities.
Figure 9.1 – Risk Perception of Investment Instruments
Bonds 4.9% 57.3% 31.4% 6.3%
Equities 14.3% 59.6% 21.2% 4.8%
Mutual Funds 16.9% 72.7% 9.6%
0.0% 25.0% 50.0% 75.0% 100.0%
Very Safe Safe Unsafe Very Unsafe
N = 5,356 (all urban investors, SIS 2015).
87. Securities Exchange Board of India, Public Notice; CRISIL Ratings, CRISIL Annual Default; ONICRA, ONICRA Default Study (see Footnotes 1, 2
95
While risk perceptions seem to not completely be in line investments (12 percent expect High returns and 28
with reality, especially for debentures and derivatives, percent Low). Due to the sharp drop in commodity prices
the returns expectations completely align with historical in 2015, it appears that retail investors are expecting
data. Figure 9.2 depicts the returns expectations a sharp rebound and thus, there is anticipation that
of investors and illustrates that among traditional commodity futures will reap high returns whereas, with
investments, returns expectations are highest for only 12 percent expecting high returns from currency
equities (29 percent High), followed closely by Mutual or equity derivatives, investors seem not very hopeful
Funds (25 percent High). On the other hand, returns about either the fate of the INR or the returns from the
expectations from Bonds are lower than that from other stock market this year after a stellar performance (BSE
Sensex was up 25 percent) in 2015.
Figure 9.2 – Returns Expectations
Commodity Futures 4.3% 46.1% 49.6%
Derivatives 10.8% 76.9% 12.3%
Debentures 27.8% 60.4% 11.9%
Equities 10.7% 60.6% 28.7%
Mutual Funds 7.2% 67.8% 25.0%
0.0% 25.0% 50.0% 75.0% 100.0%
Low Medium High

96
Analogous to returns expectations (and unlike risk the liquidity in equity and equity derivative markets tend
perceptions), investors also appear to have a fair be similar in India88 while on the other hand, currency
understanding of the liquidity amongst investment and commodity markets usually do not trade in spot
vehicles (Figure 9.3). Market participants realize the low currency and physical commodities and are thus, not as
liquidity of debt instruments and the high/moderate liquid89.
liquidity of equities and mutual funds. Overall, equities
are quite accurately perceived to be more liquid than The liquidity perception of derivatives are also
mutual funds. The data also shows that derivatives considered significantly higher than of bonds, which
are considered equally or somewhat more liquid than aligns with reality as secondary markets for bonds are
mutual funds and equities. This is close to reality, since limited.
Figure 9.3 – Liquidity Perception
100.0%
7.5%
15.0% 16.6% 16.8%
25.6%
75.0%
57.1%
50.0%
80.5% 78.9% 79.7%
66.6%
25.0%
35.4%
4.6% 7.8% 4.5% 3.5%

0.0%
Mutual Funds Equities Debentures Commodity Futures Derivatives
Illiquid Moderate Liquidity Highly Liquid
88. Sudhakar Reddy Syamala, V.N. Reddy, and Abhinav Goyal, “Commonality in Liquidity: An Empirical Examination of Emerging Order-Driven Equity and
Derivatives Market”, Journal of International Financial Markets, Institutions and Money, Forthcoming
89. Chicago Mercantile Exchange (CME) Group, CME FX Futures: A Sound Alternative to Cash FX, Chicago: CME Group, 2010, last accessed March 14, 2016,
https://www.cmegroup.com/trading/files/tradingfxfutures.pdf
97
Household Risk Perceptions and Sentiments

The SIS data on risk, returns and liquidity perceptions but also possesses infinite computing capabilities.
demonstrates that while individual retail investors are Nevertheless, behavioural economics and finance
surprisingly rational about certain aspects of financial brings economic research closer to reality and allows
decision-making, they can also be completely irrational policy makers to understand exactly where the decision
regarding a number of other market aspects. This makers are biased in their choices, how they perceive
section is divided into two sub-sections enumerating risk and returns, how they are using mental short cuts,
the areas where the Indian retail investor’s perception is and thus, informing policy outreach and financial literacy
close to reality and vice versa. programs. The word ‘risk’ itself has different meanings
to various investors. A direct question on perception of
This chapter has its roots in behavioural finance– an risk highlights the risk aversion among Indian investors.
academic field that studies the psychological aspects of When the word ‘risk’ is mentioned, ‘danger’ is the first
securities markets and market participants. Traditional word that comes to the mind of 33 percent of investors,
economic theory assumes the rational man theory and 23 percent think of ‘loss’, and yet another 20 percent
of decision making, which reasons that the decision think of it as ‘uncertainty’. Perceptions that risk can be
maker not only has complete information and can take thrilling (16 percent) or can lead to opportunities (8
instantaneous decisions that are immediately executed percent) are limited to less than a quarter of the investor
base.

98
Figure 9.4: Different interpretations of the word ‘Risk’
Uncertainty
20.5% Danger
32.8%
Thrill
16.2%
Opportunity Loss
7.8% 22.8%
N = 5,337 (urban investors, SIS 2015).
This traditional risk aversion and behavioural biases of concern. It seems that, investors are interested in
amongst investors is also visible in their choice of top- participating in the securities markets, and yet, hope
three problems with investments in the stock market to avoid any market risk. On the other hand, they are
(Figure 9.5). According to investor perceptions, volatility willing to ignore non-systematic or operational risk
is the most important ‘problem’ associated with the like corporate governance issues, potential accounting
stock markets while the fear of losing money and the fraud or trading on inside information, and thus, show a
lack of guaranteed returns are also primary reasons biased view of risk of financial securities.

99
Figure 9.5: Top Three problems with Investing in Stock Markets
60.0%
49.7%
40.0%
31.5%
20.0%
9.8%
4.4%
2.8% 1.8%
0.0%
Volatility Fear of Losing No Guaranteed Accounting Lack of Corporate Trading on Insider
Money Returns Complexity Governance Information
A large percentage of investors (Table 9.1) also showcase in stocks and bonds of well-known corporations in
the self-confidence bias and rank “Observe Markets in an attempt to minimize risk. However, 30 percent
Details” as the primary method they use to minimize mention that they invest principally in MFs to reduce
risks related to investments (31 percent). Additionally, their potential risk portfolio, further confirming the SIS
a significant percentage of investors (21 percent) display finding that awareness programs by private and public
representativeness bias when they invest primarily institutions about mutual funds have been effective.

100
Table 9.1: Process used for Risk Mitigation
Stock/Bond of Known Primarily Invest Observe Markets in Use Well-established Invest in Small
Rank Total
Company in MF Detail Brokers Parts
1 21.0% 30.0% 30.0% 6.0% 13.0% 100.0%
2 13.0% 27.0% 18.0% 21.0% 21.0% 100.0%
3 24.0% 13.0% 21.0% 18.0% 24.0% 100.0%
4 9.0% 7.0% 24.0% 36.0% 24.0% 100.0%
5 28.0% 29.0% 12.0% 9.0% 22.0% 100.0%
While there are numerous market aspects where anticipate higher returns from stocks that they had
investors display profound biases, the retail Indian perceived to be more safe. The paper shows that since
investor is surprisingly rational regarding a number of investors expect recognized companies to outperform
other market facets. 71 percent of investors feel that lesser-known companies (representativeness bias)
higher returns almost always imply higher risk. This is and since known companies tend to be larger and
an unexpected finding that showcases a high level of have less volatile stocks, in effect, investors expect
financial awareness. It is common for investors to get low risk stocks to have high returns. Surprisingly, the
swayed by the ‘guarantee’ of higher returns and ignore Indian retail investor does not showcase this strong
the risks associated with high return investments, and representativeness bias, which is further proven by their
yet, the SIS 2015 data suggests an exceptional financially lack of regard for ‘brands’ when investing. More than 70
savvy Indian investor. Shefrin (2002) 90
finds that the percent of SIS 2015’s total respondents (investors and
investor expectations tend to be entirely contradictory non-investors) declared that they did not consider a
to the reality of risk-return relationships and accordingly, recognized CEO or brand to automatically translate to a
survey respondents over a multi-year time span higher performing stock.
90.Hersh Shefrin, “Do Investors Expect Higher Returns from Safer Stocks than from Riskier Stocks?”,
The Journal of Psychology and Financial Markets, Vol. 2, Issue 4, June 2002
101
Figure 9.6: Returns Expectations by Market Capitalization
3,000
2579
2356 2295
2,000
1721
1573
1459
1323
1213 1222
1,000
0
Small Cap Mid Cap Large Cap
Highest Return Medium Return Lowest Return
This essential understanding of the risk-return market capitalization. Figure 9.6 shows the perception
relationship also correlates to an innate understanding of risk-return relationship with the size of the firm. As
of the differential risks and returns of stocks based on the can be observed in securities markets data, larger firms
have the lowest risk but also the lowest returns.

102
Figure 9.7: Risk Perceptions by Market Capitalization
3,000
2627
2,500 2374
2271
2,000
1774
1535
1,500 1413
1342
1192 1214
1,000
500
0
Small Cap Mid Cap Large Cap
Highest Risk Medium Risk Lowest Risk
Taxation is yet another area in which the Indian The SIS 2015 data presents a mixed picture of the
investor’s rationality is striking. While the SIS 2015 data Indian investor, where a risk-related understanding of
has found that tax savings is not a primary reason for the markets are the weakest and the self-confidence
investing (probably due to lack of tax savings investment bias is profound while they display a high level of
instruments or due to the very low tax net in India, as sophistication in their understanding of other aspects
discussed in Chapter 4), most investors (85 percent) of the markets like returns, liquidity and even the risk-
do consider the ex-post tax impact when they take return relationship. Outreach efforts from private and
investment decisions. public agencies should be focused to help mitigate the
issues arising from the former.

10 SEBI AND INVESTOR LITERACY PROGRAMS
103
AWARENESS OF REGULATORY POLICIES,
KEY FINDINGS
è According to SIS 2015, 32 percent of surveyed urban investors have

participated in either a government or a private investment awareness
program.
è While SEBI programs are the most popular, private firms also have
prevalent financial literacy programs.
è About 95 percent of investors consider these programs to be beneficial.
è Newspapers are not only the most important source of information

regarding awareness programs but they are also the most visible source
of communication from SEBI.
è Nearly 50 percent of investors have visited SEBI website.
è Overall awareness levels concerning rules and regulations pertaining to

the securities markets are high among the investor community:
• 88 per cent follow government and regulatory policies relating
to markets.

• 78 percent are aware of SEBI policies that help boost retail
market investment.

• 90 percent are satisfied with SEBI-initiated KYC uniformity.

• 82 percent are aware of the simplified Saral Account Opening
Forms (AOF).
è However, 84 percent of surveyed respondents affirm that SEBI’s

efforts to publicize securities markets policies need improvement.
è In case of grievances, while investors knock on multiple doors

(including their financial intermediaries and the police), more than
50 percent choose to approach SEBI.

104
Chapter Rationale
A recent paper in the Journal of Finance shows91 Furthermore, the SIS 2015 discovers that though
significant evidence that, “Nearly all households that television and SEBI website are significant means of
score high on financial literacy or rely on professionals or information dissemination (nearly 50 percent of surveyed
private contacts for advice achieve reasonable investment investors have visited SEBI website), newspapers are not
outcomes. Compared to these groups, households with only the most important source of information regarding
below-median financial literacy that trust their own awareness programs but they are also the most visible
decision-making capabilities lose an expected 50 bps on channel of communication from SEBI.
average.” Although the consequences of muted financial
literacy had not yet been computed when SEBI was Arguably, owing to these wide-ranging levels of
formed, regulatory awareness and financial literacy has communication and information dissemination, overall
always been an important SEBI directive. awareness levels concerning rules and regulations
pertaining to the securities markets are high among the
SEBI (as well as other private securities markets investor community. Although more than 80 percent of
participants) conduct awareness literacy programs to surveyed investors are familiar with SEBI’s rules relating
encourage participation, improve awareness about to the uniformity of KYC or the Saral AOF procedures,
markets and also help investors recognize the potential an equivalent percentage affirm that SEBI’s efforts to
value of long-term investing and the common pitfalls publicize securities markets policies need improvement.
of investing in the securities markets – namely, lack of Nonetheless, in case of grievances relating to the
diversification, overconfidence and name recognition securities markets, while investors approach multiple
bias. While SEBI programs are the most popular, nearly agencies (including their financial intermediaries and
30 percent of the surveyed urban investors have the police), more than 50 percent choose to get in touch
also participated in either a government or a private with SEBI, primarily due to its well-regarded role as the
investment awareness program and 95 percent of these regulator of the securities markets.
participants consider such programs to be beneficial.
91.Hans-Martin Von Gaudecker, “How Does Household Portfolio Diversification Vary with Financial Literacy and Financial Advice?”,
Journal of Finance, Vol. 70, Issue 2, March 12, 2015
105
Introduction
To help understand the general public’s level of participation in the securities markets and improve the
awareness concerning regulatory policies, it is crucial level of awareness about these securities. Not only does
that policy makers are well acquainted with the this provide a metric to measure the success of past
financial literacy programs that SEBI (and other private programs but it also helps create a road map for future
securities markets participants) conduct to encourage potential outreach strategies.
Investor Literacy Programs

As mentioned earlier in the chapter, financial literacy is in such programs’, and ‘lack of awareness’ regarding
a prime driver of investment returns, and thus, should program details. Thus, it is essential that regulators and
be encouraged. According to the SIS data, a little over agencies try to impress upon investors that financial
32 percent (1,418) of the survey respondents have literacy programs or financial planners affect portfolio
attended financial literacy/education programs. Of these returns positively.
respondents, a 100 (i.e., 7 percent of all respondents who
have been to a financial literacy program) have attended According to Table 10.1, while investors gained awareness
a program by SEBI, while 6 percent have attended about financial education and literacy program from
programs by private wealth management groups. a variety of sources, newspaper still remains the most
popular medium for information in this sphere. Word-
However, most investors did not participate in any of-mouth from friends and family, closely followed by
financial literacy or education programs and neither did SEBI website, are also significant sources of information
most of them specify a reason for non-participation. dissemination and rank higher than television. This
Amongst those who did specify, reasons included ‘lack data highlights the importance of regulator outreach
of time’, the perceived ‘lack of need to participate also shows its effects on investor choices and improved
financial literacy.
106
Table 10.1 – Source of Information about Financial Literacy Programs
Newspapers Friends/Relatives SEBI Website Television Hoardings Brokers
458 448 431 352 184 32
N = 1,905 (subset of urban investors who responded, SIS 2015)
Most of those who participated in these programs (a third participated in these programs, thus if there was
total of 205) did so in 2013, 170 respondents participated no effect of participation, a third of current investors
in 2014 while a mere 60 participants attended in 2015 in every market instrument would be participants in
(till September, 2015). The participation in these literacy these financial literacy programs. However, the cross
programs can be termed useful if it helped investors tabulation in Table 10.2 shows a stark difference.
deal better with risk and make smarter investment Investors who participated in financial literacy programs
choices. Cross tabulating data from investment choices make up 32 percent of all investors and similarly 34
and investor education, it can be seen that investment percent of all mutual fund investors (as well as 34 percent
choices in equities and mutual funds are not related to of equities investors). However, they form a very small
participation in financial literacy programs. However, portion of investors in derivatives (only 16 percent) and
when tabulating leveraged instruments like Commodities futures (only 14 percent). The effects of leverage can
Futures and Derivatives (Equities/Currencies) it is seen be significant for retail investors, and the risks from
that participation in these markets amongst program the sharp swings in valuation of levered instruments is
participants is lower. Among the investors, about a usually always mentioned in financial literacy programs.

107
Table 10.2 – Tabulation of Investors by Participation in Investor Education Programs
Commodity
Current Investment Mutual Funds Equities Derivatives Debentures All Investors
Futures
Non-Participant 1591 1376 243 645 126 2982
66.2% 65.8% 84.1% 75.9% 85.7% 67.8%
Participant 814 715 46 205 21 1418
33.8% 34.2% 15.9% 24.1% 14.3% 32.2%
Totals 2405 2091 289 850 147 4400
The final word on investor literacy programs, whether programs helped them make the right decisions
undertaken by SEBI or other private firms, lies with concerning their investment choices, while 91 percent
investors. According to the survey, nearly 95 percent of found these programs adequate for allowing them to
relevant investors found that these investor education take the right investment decisions.
Outreach Efforts and Its Success

The SIS survey attempts to not only understand investor programs, survey participants were closely questioned
behaviour but it also helps generate informed policy concerning the manner and medium of their interaction
decisions by measuring the outcomes of outreach with SEBI.Figure 10.1 details out the responses.
programs. To gauge the success of SEBI’s outreach

108
Figure 10.1 – Reaching Investors: Sources of Communication from SEBI
4,000
3,392
3,000
2,502 2,450
2,001
2,000
1,033
1,000
0
Newspaper TV SEBI Website SMS Radio
Despite the rise in new media, newspapers still remain • 87 percent regularly follow government and
the most successful mode of communication for SEBI regulatory policies pertaining to securities markets.
in urban areas. Television comes a close second, but
with a larger cost attached to it. SEBI website is also • 76 percent are aware of the measures taken by
very visible, with 46 percent of the securities markets SEBI to boost retail participation in securities
investors having visited it and received information from markets, viz., reservations for retail investors in IPO,
it. In the previous survey, only 7 percent of investors introduction of direct plans with lower expense
used SEBI website for information. ratio, Basic Service Demat Account (BSDA), discount
in Offer For Sale etc.
Overall investor awareness about SEBI’s as well as other
regulatory rules are very high amongst the sampled • 93 percent are satisfied with the uniformity
investors. of KYC norms initiated by SEBI.

109

• 78 percent are aware that individual investors can • 77 percent are aware of the Consolidated Account
open a trading account and demat account by filling Statement (CAS) facility that allows an investor to
up a simplified Account Opening Form (AOF) termed view all of his/her investments in Mutual Funds and
SARAL AOF that requires just one documentary securities (Demat) at one place
proof of address (either residence/correspondence
or permanent) while opening a trading account and However, despite such high levels of awareness of
/ or demat account to participate in cash segment regulations and policies, when asked about publicity,
(unsurprisingly) 83 percent of securities markets
• 80 percent are aware of the investor grievance investors mentioned that there is further need to
mechanism and the arbitration mechanism publicize information by regulators.
available at the stock exchanges.
Redress Mechanisms for Grievances

Following up on grievances, especially quick and gauge exact causes of markets-related issues and
impartial resolutions, is key to the success of a regulator’s especially the resolution methodology, the survey
function and affirms faith in the securities markets. questioned investors in detail. Figure 10.2 highlights
From websites to telephone helplines, SEBI has created the fact that while investors knock on multiple doors to
multiple grievance redress apparatuses and based on address their concerns, about 71 percent are aware of
the survey findings, the awareness of these processes SEBI’s grievance redress mechanisms and more than 50
and associated policies seem to be significantly high percent of those with troubles reach out to SEBI. Almost
amongst investors. SEBI Complaints Redress System 50 percent of investors contact their brokers, the police
(SCORES) portal has been created specifically for the or the company concerned while just 13 percent of these
purpose of providing investors a user-friendly tool for complaints are communicated to the stock exchanges.
complaints about the securities markets. To precisely

110
Figure 10.2 – Recourse for Grievances Regarding Financial Markets
60.0%
51.1%
48.3%
46.0%
41.8%
40.0%
20.0%
13.2%
0.0%
SEBI Market Participants Police Companies Stock Exchanges
N = 4,400 (subset of urban investors who responded, SIS 2015)
According to SIS 2015, amongst those investors who itself. While the SCORES portal allows easy online
filed a complaint with SEBI, 87 percent were satisfied complaints to be filed against both listed companies and
with SEBI’s feedback. It is important to note that while financial intermediaries, investors may lodge complaints
SEBI satisfactorily sorted about 88 percent of these by writing to SEBI. They may seek help from SEBI helpline.
complaints, nearly 49 percent of those investors who
approached SEBI had issues while lodging the complaint

11 BEHAVIOUR AND PREFERENCES
111
GEOGRAPHICAL ANALYSIS OF INVESTOR
KEY FINDINGS
è Cultural/regional influences strongly impact investment decisions.
è 50 percent of all Indian investors are from the West zone while a mere
7 percent reside in the South zone. The North and East zones constitute
26 percent and 15 percent, respectively.
è 27 percent of West zone respondents are investors whereas just 15

percent, 9 percent and 5 percent of respondents from the North, East
and South invest in the securities markets.
è The regional differences persist even amongst high-income and higher-

educated groups.
è While 32 percent of the population in the top-15 cities are investors,

barely 1 percent from the bottom-5 cities participates in the securities
markets.

112
Chapter Rationale
A pan-Indian survey that focuses on drawing out The North and East zones constitute 26 percent and 15
regional and cultural disparities, which strongly influence percent, respectively. Additionally, 27 percent of the
investment behaviour and investment instrument West zone respondents are securities markets investors
choices (with emphasis on savings, investments and risk whereas, just 15 percent, 9 percent and 5 percent
aversion) unmistakably shows that even after controlling of respondents hail from the North, East and South
for other factors like income and education, cultural/ zones. This strong regional incongruence persists even
geographical influences strongly impact investment amongst high income and high education groups that
decisions. This seems to be the key to answer the tend to invest more in the markets. A deeper probe into
questions that arise from the surprising statistics the survey data proves that more localized, city-level
emerging from the SIS 2015’s geographical focus data statistics also portray similar discrepancies in investor
from across the four Indian zones. According to this behaviour: 32 percent of the top-15 cities are investors
data, about half of all Indian investors are from the West while among the bottom-5 cities, barely 1 percent
zone while a mere 7 percent reside in the South zone. participate in the securities markets.
Introduction
Academic research has established that racial and for other factors like income and education92. The SIS
ethnic differences have a profound influence on savings, 2015 data compares and analyzes investment choices
investments and risk aversion, even after controlling across Indian states and zones and reaches the same
conclusion.
92. Sharmila Choudhury, “Racial and Ethnic Differences in Wealth and Asset Choices”, Social Security Bulletin, Vol. 64, No. 4, 2001– 2002
113
Where Are The Investors?: A Zonal Analysis

The SIS 2015 data finds that a variety of underlying geographical zones illustrates that cultural influences are
factors like income, education and occupation affect one of the most important considerations affecting the
investment behaviour and investment instrument investment decision process. It is not a mere accident
choices, whereas certain factors like age or marital that more than 50 percent of investors in the country
status seem to have no effect at all (see Chapter 4 for reside in the West Zone while just 7 percent are from the
details). However, the distribution of investors across South (see Figure 11.1).
Figure 11.1: Percentage of Indain Invetors by Zone
East
15.2%
West North
51.2% 26.5%
South
7.2%

114
To control for differing sample sizes across zones based respondents are investors, respectively. Since this data
on population and sampling techniques (see Chapter 3), is in line with the zonal numbers for demat accounts,
Figure 11.2 represents a zonal heat map with investors these surprising results are not in doubt. Remarkably,
as a percentage of respondents. In the West Zone, 27 according to data from National Securities Depository
percent of respondents are investors while the North Limited (NSDL)93, only two states in the West zone
has 15 percent of respondents as investors. In the (Maharashtra and Gujarat) account for nearly 40 percent
East and the South zones, 9 percent and 5 percent of of demat accounts in India.
Figure 11.2: Investors as Percentage of Zonal Survey Respondents
93. Rediff.com, Five States Hold 60% of Total Demat Accounts, December 07, 2007, last accessed December 11, 2015,
http://www.rediff.com/money/2007/dec/27demat.htm
115
Additionally, to confirm that it is cultural distinctions Chapter 4 for details), the other primary driver for
and not underlying, unobserved homogeneity regarding investment is education: higher education indicates
other attributes that produce these results, a more a higher propensity to invest. Nonetheless, the zonal
detailed socio-economic analysis of the data provides a differences persist even amongst respondents with more
confirmation. Across zones, amongst the income group than 10 years (11-15 and 15+) of education. The West
that earns higher than `20,000, an analogous difference and the North zones record 31 percent and 20 percent
in percentage of investors is clearly noticeable. In the of the highly educated group as investors, respectively,
South, only 9 percent of the population with incomes while it is 11 percent and 8 percent in the East and South
higher than `20,000 invests in the securities markets, zones, respectively. This distinctive variance between
whereas, in the West, more than 30 percent amongst the West zone and the rest of the country has remained
the same economic group invests in securities markets. consistent over the time; in the 2011 survey, 55 percent
Moreover, according to the SIS 2015 analysis (see of all investor households were from the West Zone.
Risk Aversion and Zonal Investment Choices

Historically, bonds/debentures are the lowest risk A geographical break up of investment instruments data
investments among the securities market instruments showcases the degrees of risk aversion (Table 11.1).
analyzed in SIS 2015. Mutual funds, while riskier Investors in the South have the lowest investments in
instruments than bonds, have lower risk than equities the riskier derivatives and futures instruments, while
due to the benefits of diversification. And derivatives are it is the North which leads in investments in these
riskier than equities due to the volatility from leverage. instruments.

116
Table 11.1: Investors and Investment Instruments Used, by Zone
Instrument East North South West

Mutual Funds 633 859 212 1832
Equities 143 804 157 1837
Debentures 37 218 88 913
Derivatives 0 212 5 294
Commodity Futures 163 143 19 44
Totals 812 1419 385 2740
This risk aversion is also supported by the data from a One surprising result is a higher incidence of trading
direct question on risk. When asked what was the first in currency futures in the North and the East, when
thing that comes to their mind when they hear the word compared to the West (see Figure 11.2). While risk
risk, the word loss was mentioned by nearly 40 percent aversion should lead to lower investments in derivatives
of respondents in the South, compared to 29 percent markets, this might seem counter-intuitive. However,
in the West, and 12 percent in both East and the North. since the North and the East land have international
Thus risk aversion levels are highest in the South both borders, this might be an effect of cross-border trading
from the respondents’ stated and revealed preferences, (formal and informal) in certain areas which creates this
while it is lowest in the North. demand for currency futures.

117
Figure 11.3: Commodity Futures Demand Map
N = 369 (all currency derivative investors, SIS 2015)

118
Does The Education-Investment Correlation Hold True in Every Zone?

One of the key findings of the urban data analysis of display the percentage of investors by education levels,
SIS-2015 is the Education-Investment correlation (see with the education levels increasing with the size of the
Chapter 4 for details). To understand whether this circle. The smallest (inner most) circle depicts those
relationship is robust across the state groups, this data respondents who are not literate, while the outer circle
is visualized in a Figure 11.4. The concentric circles represent those with over 15 years of education.
Figure 11.4: The Education-Investment Correlation across Zones
East Non-Investor
North Non-Investor
Investor Investor
South Non-Investor West Non-Investor
Investor Investor

119
A Comparison Between the Top-15 and Bottom-5 Cities

Similarly, the top 15 cities in terms of total investors the East and 1 from the West. The high representation
are concentrated in the West zone although large urban of the East in this list is due to 3 cities of the North East,
clusters in other parts of the country also feature in that which have a negligible rate of investors. However, even
list. Amongst the top-15 cities, the West zone not only in the North East zone, there are significant intra-zonal
records a total of 10 cities (whereas there are just 3 cities differences. Cities like Gangtok, Guwahati and Tinsukia
from the North, 1 from the East and 1 from the South), have significant investors while cities like Imphal, Shillong
all the top-5 cities are from the West zone too. Amongst and Kohima have literally no investors. Since neither
a total of 9,798 survey respondents from these cities, household income nor education can rationalize these
32 percent are investors. In sharp contrast, less than disparities, it appears that it is local cultural influences
1 percent of the population in the bottom-5 cities are that are the key factors in investment decisions.
investors. In this group, 1 city is from the South, 3 from

12 SURVEY
120
THE MARKET PARTICIPANTS’
KEY FINDINGS
è Most Market Participants (MPs) (63 percent) are in business for over 10
years, while 32 percent are in it between 5 to 10 years. The numbers
vary by segment, with nearly all (98 percent) Depository Participants
(DP) and only 51 percent sub-brokers and mutual fund agents are in
the business for over 10 years.
è Most MPs focus on the secondary markets alone, except DPs who
usually participate in both
è Unsurprisingly, DPs also have the largest customer base, with brokers
following them in size, while most Authorized Persons and MF Agents
have a smaller customer base.
è More than 90 percent (919 out of 1,016) MPs operate within their city
limits. It is predominantly DPs (72) who function outside their state of
origin.
è Equities (56 percent) are the most popular instruments traded via
financial intermediaries, followed by mutual funds (45 percent). Less
than 5 percent invest in derivatives or bonds.
MPs’ perceptions of risk, returns and time horizons for plain vanilla
instruments like equities, mutual funds and bonds are in line with
è reality. However, even among these market participants, comparative
risk-returns for derivatives are skewed lower than historical data.
è Only a few MPs find their business has declined over the past 5 years.
This is arguably due to survivorship bias.

121
è To attract new clients, most MPs use face-to-face interaction (52

percent), followed closely by mass media advertising (51 percent) and
phone calls (50 percent). While bulk SMS (45 percent) is still popular,
social media (17 percent) is not yet a common practice.
è To retain existing clients, most MPs improve client services (52 percent)
and offer additional services at discounted rates (51 percent).
è In many instances, MP and Investors have different perceptions on the

same subject. While investors mention that market risk like volatility is
the primary cause of low market participation, MPs think it is due to the
availability of safer high return, low risk alternatives

122
Chapter Rationale
The Market Participants’ (MPs) Survey includes MPs mention that it is due to the availability of low
responses from a total of 1,016 respondents, 100 risk, high return savings alternatives. However, the
brokers, 311 Sub-Brokers, 305 Authorized Persons (AP), reason behind why investors participate in the markets
90 Depository Participants (DP) and 210 Mutual Fund showcases disconnect between MP and investor views.
Agents (MFA),from across the country. The various For investors, the reason why they participate in capital
types of market participants are unique in their size, markets is primarily for capital gains, while according to
geographical footprint and market focus. For instance, MPs, those engaging their services use it for retirement
DPs are not only larger in size but also in client volume and capital preservation.
and operate within a broader geographical area (i.e.,
they also function outside one’s city or state). They are Additionally, despite their central position in securities
also in the business for significantly longer than brokers, markets, MPs also showcase some biases and lack of
sub-brokers or APs. information. While MPs mentioned 67 percent of their
The business of market participants is going through clients have engaged in panic selling, yet only 33 percent
significant changes and upheavals. While the direct of them would urge investors not to sell during a sharp
reasons for the troubled business environment downturn. And though they have a clear idea of the risk-
enumerated by participants for these are unsurprising return-time horizon profiles of equities, mutual funds
and include competition, taxes, and lower commissions. and bonds; in the case of derivatives, most MPs do not
The detailed survey also highlights crucial incongruities correctly perceive the comparative risk and returns
between financial intermediaries and their clients, profiles of derivatives.
that is, between the suppliers and the consumers of These disconnects could be considered in the light of
securities markets services. Both investors as well as MPs the fact that a mere quarter of MPs have taken part in
consider, directly or indirectly,‘riskiness’ of the securities trainings provided by private and public organizations,
market as the primary reason for low participation despite 100 percent of participants being aware of them.
of retail investors. Investors mention market risks as Additionally, the regularity with which they learn about
the primary cause of low market participation and policies and regulations too need to be improved with
only 35 percent keeping track of policy and regulatory

123
changes more often that once a month. of mouth and mass media seems to be the preferred
second rank information source. Technology has been
The competitiveness which affects MPs in the market is the primary reason for improving business for MPs, with
also clearly visible from the significant efforts that they improving technology and web access providing better
are taking to acquire new clients, with over half using margins and expansion possibilities.
face-to-face interactions and similar numbers using
mass media advertising and tele-calling. Only 17 percent Despite the wide-spread shutting down of MPs, only few
uses social media making it visible that similar to their in the current survey find that their businesses suffered
clients, MPs also exhibit a preference for ‘traditional’ in the past five years. This is arguably due to a survivor
methods of conducting securities markets transactions. bias arising out of the consolidation in this industry.
When MPs reach out to their client (nearly 67 percent at And, while regulation tends to be a ‘pain point’ for most
least once a quarter) nearly half place a call, and nearly industries, it is heartening to find out that the regulator’s
20 percent prefer to meet or to SMS. While letters have role has positively affected the business of the MPs.
completely become outdated, email seems to be the
most popular second line of communication. However,
in case of receiving information MPs showcase their
tech-savviness with 40 percent ranking social media as
their most important source of information, followed
by company website and then by mass media. Word
Introduction: Financial Intermediaries in India 94

Over the past decade, although brokers and market As of 31st March 2015, there were a total of 6,147 cash
participants continue to have a large role to play in segment brokers, a drop of 35 percent from the previous
securities markets functions, the global trend has been year’s number of 9,411 (at the end of FY 2011-12, this
that large numbers of investors are moving to online was 10,268)96. The number of sub-brokers fell by 18
trading and investments95. percent from 51,885 at the end of FY 2014 to 42,351
94. From Chapter 8, SIS 2015

95. Andre Cappon, “The Brokerage World Is Changing, Who Will Survive?”, Forbes, April 16, 2014, last accessed January 15, 2016,
http://www.forbes.com/sites/advisor/2014/04/16/the-brokerage-world-is-changing-who-will-survive/
124
at the end of FY 2015 (at the end of FY 2012, this was in Turnover in Cash Segment” shows that while the top
77,141). In April 2015, the first month of FY 2015-2016, 25 brokers accounted for 38 percent of transactions in
the number astoundingly dropped to 3,195 brokers and 2008-09, the share has moved up to 51.2 percent in
41,625 sub-brokers. The number of brokers in derivative March 201598. When the SIS dug deeper to try and ferret
segment increased from 2,337 in FY 2012 to 3,031 in out the exact reasons for the drastic drop in the number
FY 2014 further to 2,810 at the end of April 2015. The of brokers, it seems a wide array of factors—from limited
traditional dynamics of the industry are shifting as retail trading frequency and rising Internet penetration
smaller brokers are either disappearing or are merging to a surge in the number of APs and the shuttering of
to form larger, more stable consolidations97. numerous subnational exchanges over the past year—
SEBI’s data on the “Percentage Share of Top ‘N’ Members are all critically affecting the brokerage industry99.
97. Ashish Rukhaiyar, “Shares of Larger Brokerages on the Rise”, Mint, May 04, 2015, last accessed March 10, 2016,
http://www.livemint.com/Money/Rvg2dixqzRH5Eh2Qj05x1N/Shares-of-larger-brokerages-on-the-rise.html
99. Ashley Coutinho, “Brokers Shut Shop on Falling Volumes, Compliance Costs”, Business Standard, January 12, 2016, last accessed January 16, 2016, http://
www.business-standard.com/article/markets/brokers-shut-shop-on-falling-volumes-compliance-costs-116011200755_1.html
125
A Close Look at the Market Participants’ Industry

The Market Participants’ Survey includes responses (MFA) and 311 Sub-Brokers (total of 1016 respondents)
from 305 Authorized Persons (AP), 100 Brokers, 90 from across the country (Figure 12.1). This is the first
Depository Participants (DP), 210 Mutual Fund Agents comprehensive survey of market participants in India,
and in a unique feature of SIS 2015.
Fig 12.1: Market Participants Surveyed across the Country
The dots in the map indicates the concentration of the sample sizes of the Market Participants

126
While they are broadly in the same industry, these MPs and they are larger institutions which are older, have
are unique in the aspect of the business they service larger number of clients and function across primary
and their relevance to the securities market. APs are and secondary markets. Figure 12.2 shows the size of
individuals registered with exchanges. They are similar customer for the various financial intermediaries. While
to sub-brokers, only difference is that they do not have around 20 percent of APs, MFAs and Sub-Brokers have
trading terminals. Although each of the five types of less than a 100 clients, and very few of them have more
respondents are a financial intermediaries, the various than 1000 clients, nearly all DPs have over a 1000 clients.
types of market participants are unique in their size
(Figure 12.2). Depository participants are few in number
Figure 12.2: Number of Customers Serviced by Different Market Participants
100
86
82
79
80 76
72 70
67
63 63
60 54
50 48
47
40
30 32
26
18
20 14 14 12
9
1 1 1 1
0
Authorised Persons Brokers DPs MF Agents Sub-Brokers
<100 100–200 200–500 500–1000 1000+
N = 1,016 (Market Participants’ Survey, SIS 2015)

127
Similarly for geographical coverage, the MPs vary in their their state of origin. Not a single firm in these categories
footprints. As can be expected, nearly all APs, MFAs and function outside the state lines. However, it is converse
Sub-brokers only function within their cities while 8 for DPs and only 11 percent of them are focused within
percent brokers function outside their city but within their cities, and 80 percent reach out beyond their state
of origin.
Figure 12.3: Geographical Base of Market Participants
1.3% 1.6%
100.0%
8.0%
75.0%
80.0%
50.0% 98.7% 100.0% 98.4%
92.0%
25.0%
8.9%
11.1%
0.0%
City State National
Most market participants are in the securities market The shuttering of hundreds of MPs as discussed in the
for over 10 years and among them, DPs even longer previous section has led to a visible consolidation in the
on an average (Table 12.1). It is likely that this is a sign industry, and the survivors of these consolidations are
of a survival bias among the responses for this survey. respondents to this survey.

128
Table 12.1: Business Age Distribution for Market Participants
Authorised Persons Brokers DPs MF Agents Sub-Brokers Total

More than 10 years 187 78 88 118 169 640
5 to 10 years 107 17 1 80 123 328
1 to 5 years 9 3 1 9 19 41
Less than a year 2 2 0 3 0 7
Total 305 100 90 210 311 1016
The large scale closures of sub-brokers have also been these market participants, while most primarily deal
balanced by the APs entering the markets. And among with secondary markets, DPs participate in both primary
and secondary markets (Figure 12.4).
Figure 12.4: Market Focus (Primary or Secondary) of MPs
150
137
131
120 116
90 85 83 84
78
63 63 64
59
60
30 20 21
4 6
0
Primary Only Secondary Only Both

129
The Business of Market Participants: Information, Interactions, and Perceptions
The business of market participants is going through data as well, while client’s access to internet, not a key
significant changes and upheavals, with rising competition reason, has started affecting the earnings of MPs. It
from larger players in a shrinking business line. This is can be expected to become one of the reasons as the
clearly reflected in the survey data as well (Figure 12.5). internet savvy generations reach the age of investing,
More than 40 percent of MPs have been negatively and clients, through their experience of e-commerce,
affected by competition in their business in the past 3 become more comfortable with e-investing. SEBI has
years. MPs also have lost out due to Transaction taxes also taken significant steps in the direction of improving
(42 percent) and Exchange Regulations (38 percent). access to securities markets investing through the
Lower commissions are marked visible from the global internet.
Figure 12.5: Top-5 Reasons for the Decline in the Market Participants’ Business
45.0%
42.3% 42.2%
40.0% 39.5%
38.6%
37.9%
35.0%
Competition Transaction Taxes Exchange Commissions and Clients' Access to
Regulations Fees Internet

130
The shuttering of broking firms/companies, the declines participation rates, followed by No ‘Guaranteed Returns
in the business of MPs (and its reasons) is apparently and Fear of Losing Money (Table 12.2). And the main
contradictory with the findings of SIS 2015, where it Secondary Reason (most often Ranked II) is Volatility.
is reiterated often that financial intermediaries play This is somewhat in agreement with the investors view
an important role in retail investors’ behaviour. When point where they find securities market comparatively
asked why participation rates in investment markets risky. Most of the investors’ responses clearly focused
are low among retail investors, MPs felt that Safer on various aspects of market risk (like volatility and
Available Alternatives are the primary reason for low inadequate returns) followed by lack of information as
the primary issue they face with the markets.
Table 12.2: Reasons for Low Participation in Securities Markets
Safer Lack of
No Guaranteed Fear of Losing Accounting Market
Alternatives Volatility Corporate
Returns Money Malpractice Manipulation
Available Governance
Rank I 297 272 187 112 99 37 10
Rank II 157 158 226 251 88 69 18
Rank III 103 103 70 103 73 81 12
But, the detailed survey also highlights crucial according to MPs, those engaging their services use it
incongruities between financial intermediaries and primarily for retirement and capital preservation, while
their clients, that is, between the suppliers and the capital gains and interests/dividends are ranked much
consumers of securities markets services. The reason lower (Figure 12.3). This might be an effect of the
behind why investors participate in the markets average age of investors using the services of financial
showcases this disconnect between MP and investor intermediaries, that is, younger groups do not engage
views. For investors, the reason why they participate in intermediaries and invest on their own, while those who
capital markets is primarily for capital gains, followed do engage these intermediaries are older and this have
closely by improvement in lifestyle. Additionally, a retirement focus. But, this data yet shows a strong
liquidity needs, and home buying also play a crucial disconnect between the risk attitudes towards securities
role behind investing (Chapter 4, Figure 4.2). However, market.

131
Table 12.3: Reasons for Clients to Invest in Securities Markets
Capital Interest/ Regular

Retirement Capital Gains Tax Liquidity
Preservation Dividend Income
Rank I 293 279 228 101 99 10 6

Rank II 169 125 159 344 68 0 60
Rank III 26 44 48 103 17 22 38
Additionally, despite their central position in securities by MPs, with 1 as the least and 5 as the highest. It is
markets, MPs also showcase some biases and lack of clear that Equities are perceived as higher risk the MFs,
information. While MPs mentioned 67 percent of their which in turn are perceived higher risk than bonds. The
clients have engaged in panic selling, yet only 33 percent reverse is true for returns expectations and time horizon
of them would urge investors not to sell during a sharp require for optimal investing. These are purely in line
downturn. And though they have a clear idea of the risk- with historical data and shows that MPs understand
return-time horizon profiles of equities, mutual funds comparative risks of stocks, bonds and MFs. However,
and bonds; in the case of derivatives, most MPs do not in case of derivative instruments like equity/currency
correctly perceive the comparative risk and returns derivatives and commodity futures, they are perceived
profiles of derivatives (Table 12.4). In a 5-point scale, lower risk and lower return instruments than stocks
the risk, returns and time horizon required is ranked or MFs, showcasing the relative information shortage
about these markets even amongst market participants.

132
Table 12.4: Perceived Risk, Return and Time Horizon (Mean Score - 1 is Lowest and 5 is Highest)
Name of Instrument Risk Return Time Horizon

Equities 3.3 3.3 2.9
Mutual Funds 2.7 2.7 2.9
Debentures 1.9 2.0 2.3
Derivatives 2.2 2.1 2.1
Commodity Futures 2.2 2.1 2.0
These disconnects could be considered in the light of 28 percent have participated in any of these programs.
the fact that a mere quarter of MPs have taken part in Additionally, the regularity with which they learn about
trainings provided by private and public organizations, policies and regulations too need to be improved with
despite 100 percent of participants being aware of them. only 35 percent keeping track of policy and regulatory
These training programs have been run by SEBI, industry changes more often than once a month (Figure 12.6).
associations like AMFI, and larger private organizations Only 17 percent of respondents track policy changes
like banks and mutual funds. MPs acknowledge every week or more often, while another 18 percent do
that these programs can be helpful and 95 percent so every fortnight. A vast percentage only hear about
encourage investors to take these programs – while only policy changes when they are announced and do not
keep track of these on a regular basis.

133
Figure 12.6: How often MPs Keep Track of Policy and Regulatory Changes
Weekly
175
When Announced
340
Fortnightly
180
Monthly
321
The competitiveness and the pressure on commissions uses social media making it visible that similar to their
and fees which affects MPs in the market is also clearly clients, MPs also exhibit a preference for ‘traditional’
visible from the significant efforts that they are taking methods of conducting securities markets transactions.
to acquire new clients (Figure 12.7), with over half using It is clearly unlikely that new clients would sign on to a
face-to-face interactions via door-to-door campaigns securities market account simply by getting information
and similar numbers using mass media advertising (51 on it from social media, despite the rise in such
percent) and tele-calling (50 percent). Only 17 percent advertising over the past five years.

134
Figure 12.7: Methods for Acquisition of New Clients by MPs
60.0%
50.9% 52.3%
50.2%
45.1%
40.0%
20.0% 17.3%
0.0%
Mass Media Ad Bulk SMS Tele-Calling Door-to-Door Social Media
Campaign
Even when MPs reach out to their clients, this bias instrument of contact, with nearly 20 percent preferring
towards ‘traditional’ methods are consistently visible. to meet in person and similar number using a SMS.
Nearly 67 percent of MPs reach out to their clients While letters have completely become outdated, it is
at least once a quarter, with a majority of them even obvious that multiple channels of communication are
more often (Figure 12.8). And in nearly half of these open between clients and MPs and often email seems
interactions, MPs rank phone calls as the most likely to be the most popular second line of communication.

135
Figure 12.8: How Often and via What Means do MPs Keep in Touch with their Clients
50.0% 45.9%
40.0% 37.0%
30.0% 24.5%
23.2%
19.0%
20.0% 16.0%
15.7%
8.6%
10.0%
3.3%
1.9%
0.0%
Email SMS Call Meeting Letters
Rank I Rank II
Daily Weekly Quarterly Half-Yearly Yearly

21.3% 15.6% 29.6% 26.7% 6.8%
However, in case of receiving information, the results of mouth and mass media seems to be the preferred
the survey were surprising and MPs showcase their tech- second rank information source. It is thus clear that the
savvy image (Table 12.5). Over 40 percent ranked social reliance on traditional methods for client acquisition
media as their most important source of information, and customer relationships is primarily demand driven
followed by company website (33 percent). Word of – the Indian investors are not yet comfortable with a
complete online experience.

136
Table 12.5: Information Sources of MPs
Information Source Rank I Rank II Rank III

Word of Mouth 5.1% 29.1% 8.6%
Mass Media 15.9% 27.4% 6.1%
Social Media 40.6% 17.9% 1.7%
Company Website 32.8% 13.6% 5.7%
Other Internet Sources 2.5% 6.1% 9.4%
Internet Forums 2.2% 0.3% 1.1%
Tips 0.9% 4.1% 0.3%
This affinity towards technology and its positive effects possibilities across geographical boundaries. While the
can also be observed from the changes in the business former seems to be useful for all types of MPs, the latter
of MPs (Figure 12.9). Technology has been the primary has not yet been exercised by most types of MPs, other
reason for improving business for MPs, with web access than DPs who provide services at the national level. And,
(51 percent) and improved trading technology (50 while regulation and regulator tend to be enumerated as
percent) leading the top reasons for improvement of a reason for lack of growth in many industries, especially
their businesses in the past five years. Both of these are in financial services, it is heartening to find out that the
reasons which can provide better margins and expansion regulator’s role has positively affected the business of
the MPs.

137
Figure 12.9: Top-5 Reasons for Improvement in the Market Participants’ Business
52.0% 51.3%
50.2%
49.0%
46.0% 45.4%
44.1%
43.7%
43.0%
40.0%
MP's Access to Trading Technology SEBI Regulations Clients' Access to Government Policies
Internet Internet
Despite the wide-spread shutting down of MPs, only few percent claimed their businesses had improved and only
in the current survey find that their businesses suffered in 25 percent said their business has declined in the past 5
the past five years. This is arguably due to a survivor bias years (Figure 12.10). This supports the Survivorship Bias
arising out of the consolidation in this industry. Despite hypothesis in the data as many players whose business
the data on brokerages shutting shops, while 31 percent declined sharply are out of business, thus survivors are
mentioned that their business was unchanged, 44 benefiting from industry consolidation and have been
surveyed as a part of SIS 2015.

138
Figure 12.10: How the MPs’ Business has Changed over the Last 5 Years
100.0%
28.9% 26.0% 30.0% 33.8% 34.4% 31.4%

75.0%
23.0%
27.2% 28.9% 24.7%
23.3% 22.5%
50.0%
25.0% 51.0%
43.9% 41.1% 42.9% 43.1% 43.9%
0.0%
APs Brokers DPs MF Agents Sub-Brokers Total
Improved Declined Unchanged
This is one aspect of the survey which also holds true significantly, while about 40 percent seeing an
across different types of MPs, with about one-third improvement in the same time period and less than 30
mentioning that their businesses have not changed percent finding some level of decline in their business.


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SEBI

Securities and Exchange Board of India

SEBI INVESTOR SURVEY 2015

SEBI Investor Survey 2015

Board of India (SEBI) on April 12 of that year. Through

in the long run8.

Thus, an equally important mandate of SEBI is to ensure

SEBI INVESTOR SURVEY 2015

Another key element of the report is a detailed survey

SEBI INVESTOR SURVEY 2015

Survey of Market Participants

SEBI INVESTOR SURVEY 2015

SEBI INVESTOR SURVEY 2015

Box I – Estimating Total Investors in India

Comparison with the Previous Investor Survey

SEBI INVESTOR SURVEY 2015

SEBI INVESTOR SURVEY 2015

Report Structure and Short Summary of Chapters

SEBI INVESTOR SURVEY 2015

SEBI INVESTOR SURVEY 2015

SEBI INVESTOR SURVEY 2015

SEBI INVESTOR SURVEY 2015

The Global Financial Crisis and its Repercussions

SEBI INVESTOR SURVEY 2015

SEBI INVESTOR SURVEY 2015

The Current Indian Economic Climate

SEBI INVESTOR SURVEY 2015

Figure 2.2: Quarterly Indian Real GDP Growth Rates

Source: Ministry of Statistics and Programme Implementation (MOSPI)

Indian Financial Markets: Primary Drivers

SEBI INVESTOR SURVEY 2015

Figure 2.3: Sectoral Distributions of Indian Economy as a Percentage of GDP

Agricultural GDP Industrial GDP Service Sector GDP

SEBI INVESTOR SURVEY 2015

Indian and Global Stock Markets: A Comparative Evaluation

Figure 2.4: Foreign Portfolio Investments/Foreign Institutional Investments (FII) in

110221 110121 111333

Source: National Securities Depository Limited (NSDL)

BSE SENSEX S&P 500 Europe Stoxx 50 iShares MSCI EM ETF

SEBI INVESTOR SURVEY 2015

SEBI INVESTOR SURVEY 2015

The Sentiment-Stock Market-Real Economy Relationship

SEBI INVESTOR SURVEY 2015

SENSEX Y-o-Y GROWTH RATE

Source: MOSPI, Bloomberg

SEBI INVESTOR SURVEY 2015

Private Final Consumption Expenditure Growth Current Situation Future Expectation

Source: RBI Consumer Conﬁdence Survey, MOSPI

SEBI INVESTOR SURVEY 2015

Source: SIS 2015

SEBI INVESTOR SURVEY 2015

Note on the Survey Process

SEBI INVESTOR SURVEY 2015

In mid-August, both the tablet-aided main survey

Note on Sample Design

SEBI INVESTOR SURVEY 2015

SEBI INVESTOR SURVEY 2015

Figure 3.2: SIS 2015: Urban Coverage