Why PPF, FD and other investors are turning to stock markets

Amid the Covid-19 pandemic, more individual investors are turning to stock markets. According to an SBI report, the number of individual investors in the market has increased by a whopping 142 lakh in FY21, with 122.5 lakh new accounts at Central Depository Services (India) Limited (CDSL) and 19.7 lakh in National Securities Depository Limited (NSDL). Furthermore, another 44.7 lakh retails investor accounts have been added during the two months of this fiscal. The NSE data shows that the share of the retail investors in total turnover on the stock exchange has risen to 45% from 39% in Mar’20.

With the onset of pandemic and subsequent lockdown, household financial savings showed a significant jump in Q1 FY21, and then a sharp moderation in Q2 FY21, says the SBI report. “However, the data shows that currency in circulation again increased in Q3 and Q4 FY21 with the incremental amount of ₹80,501 crores and ₹95,181 crores respectively compared to ₹17,225 crore in Q1. Furthermore, the markets have progressively improved with Sensex increased from 28,265 at the beginning of Apr’20 to above 52,000 now. This has led to increased investment in stocks and mutual funds in H2 FY21,” it said.

So, the question is why the small savings scheme investors are diving into the stock markets, which remain very volatile due to global cues, and aggressive trading.

Reasons for the tilt of retail investors towards stock markets

1) The lower rate in other saving avenues amidst the low-interest rate regime has led to greater interest by individuals in the stock market.

2) “Declining saving avenues amidst the low-interest rate regime has led to greater interest by individuals in the stock market. With key repo rate at 4%, the FD rates vary from 2.9% to 5.4 for different tenures (SBI FD rate). Even the current small savings rate are low, varying from 7.6% on Sukanya Samriddhi Yojana Account Scheme, 7.4% on Senior Citizen Savings Scheme, 7.1% on Public Provident Fund, and 6.8% on National Savings Certificate,” SBI Research said in its latest Ecowrap report.

3) Another reason could be the significant increase in global liquidity. This is reflected in the FII inflows in FY21, with total amounting to $36.18 billion.

4) Additionally, the pandemic which has resulted in people spending more time in their homes might also be another reason for individuals’ tilt towards the stock market trading.

5) Furthermore, the markets have progressively improved with Sensex increasing from 28,265 at the beginning of Apr’20 to above 52,000 now. This has led to increased investment in stocks and mutual funds in H2 FY21 and this higher retail participation in stock markets may become more of a self-fulfilling prophecy.

However, it is yet to be seen if this increasing retail participation is transitory or the beginning of long term behavioural change, the report said.

“There is also an issue of financial stability which has arisen recently as the stock market has boomed with real economy suffering. Our financial stability index has improved modestly to 116.2 in Apr’21 from 115.4 in Mar’21,” it added.

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