- Date : 08/11/2020
- Read: 8 mins
The COVID-19 pandemic has made investors cautious and cut expenses, but it has also made online trading popular.
Sometime in June this year, digital lending platform IndiaLends released the results of a survey it had undertaken soon after the pandemic broke out. It showed a new side to a hitherto flashy India: Indians, scared of the future, had decided to spend less.
But a different picture was thrown up around the same time by the Central Depository Services Ltd (CDSL), one of the two depositories in India with which brokerage houses (depository participants) have to be linked. According to CDSL, the ranks of retail investors of brokerage houses swelled during the height of lockdown; they added some 19.6 lakh investor accounts over April–June 2020.
This was about 6.5 lakh new investors a month, more than double the 3 lakh new additions a month over the corresponding period a year ago!
The two scenarios reflect how average Indians have reacted to the pandemic: they are cautious with their spending but not averse to investing in the stock market and creating a passive income stream. If you are new to investing, there could be a few lessons for you here in personal finance.
Falling private consumption in the stock market
Private consumption, which had driven the Indian economy for the past several years, had begun waning even before the pandemic outbreak. So much so that, according to preliminary estimates published by the Reserve Bank of India (RBI) in its annual report for 2019-20, net financial savings of households improved in the last fiscal because of the squeeze on spending.
During the COVID-19 lockdown, private consumption fell further. In the April–June quarter that witnessed the GDP contracting some 24%, private consumption saw its steepest plunge in recent years – by nearly 27%. Some analysts say private consumption will pick up again only by the beginning of next year.
All this was due to “the burden of job losses and pay cuts” that had hit the salaried class and professionals, according to Gaurav Chopra, Founder-CEO of IndiaLends. For instance, though unemployment had stopped rising further by the beginning of September, it was still high at 7.5%–8.5%. “The pandemic has changed the way we all function,” Chopra was quoted by The Economic Times as saying.
More cautious approach towards money
The extent of this mental change is reflected in the IndiaLends survey, which covered about 5000 Indians across the country. Here are a few snapshots of the findings:
- A staggering 94% conceded they needed to be very cautious about how they spent their money in the coming months;
- 84% said they were worried about their savings and financial future;
- 82% said they were facing problems making ends meet;
- 72% said they had no option other than taking personal loans to meet ‘priority expenses’ such as debt repayment, medical situations, education fees, and even home repairs.
As to where their money would go, the replies only pointed to a more conservative approach to life. About 40% of respondents said their focus on essential items would increase, while 28% said it would not change, and 27% claimed the pandemic would not slow down their spending. In comparison to this, over 70% of respondents said they would spend less on each of the non-essential heads mentioned in the survey, such as travel, entertainment, new furnishings, luxury items etc.
So much so, people were also bent towards lowering their home rental spend because of the financial constraints.
Related: What are stock SIPs?
Investment zeal was witnessed among retail investors
The overall mood reflected in the survey tallied with the second quarter contraction in private consumption. However, what did not tally was the feedback relating to investments. According to the IndiaLends survey, 76% of respondents to the poll ruled out fresh investments in the near future.
Yet, data from the market shows otherwise. As per this data, when the lockdown was at its peak (in the April–June quarter) the zeal among retail investors in the stock markets showed no signs of waning. This was despite the fact that the markets plunged from the January highs by nearly 38% in February and March – that is, just before the lockdown was declared.
After the stock market crash in March, retail investors across the country showed they were unfazed by it all. In fact, in an attempt to cash in on the gradual recovery after the crash and falling interest rates, they embraced equities for the first time.
Thousands of others explored the markets digitally – even as the lockdown brought India to a standstill. If anything, their numbers rose.
A surge of new investors
As stated earlier, the March–June period witnessed a surge of new investors, with some of India’s top online brokerage houses such as Zerodha, Upstox and 5paisa.com attracting new clients during the height of the lockdown. Trading activities too rose concomitantly.
Zerodha, one of India's largest online discount brokers, says more demat accounts were opened between January and May than the total additions to their client base the previous year. Nikhil Kamath, CIO and co-founder, told Mint newspaper that apart from the rise in numbers, the average age of these new investors too had dropped to 30.
Similarly, BNP Paribas’ Sharekhan was quoted as saying its trading activities rose, thanks primarily to a rush of new clients in the 25–30 age group, a big chunk of who were from the smaller towns.
Another player to have “made deep inroads into smaller cities and towns” is Paytm Money; in a blog on its website, it claimed that 60% of its investors are clients from small towns “experiencing wealth services for the first time”.
Upstox added nearly 3.5 lakh customers in the March–June period, which doubled its trading volumes as compared to its pre-pandemic figures.
What all this showed, according to Jaideep Arora, CEO, Sharekhan, was that the retail segment was returning. And in a way, it can all be traced back to the pandemic – but in more ways than one.
First, the fall in personal consumption since last year boosted savings; the pandemic that followed not only kept a rein on consumption but also added fresh liquidity as cautious investors stayed away from real estate.
According to Geojit Securities managing director CJ George, these two factors – fresh liquidity and increase in savings – led to the retail surge. “Lack of demand in real estate during the pandemic has contributed to retail cash flows into financial markets,” he told The Indian Express.
The second way the pandemic – and the subsequent lockdown – contributed to the ranks of investors swelling was by forcing people to stay indoors; to pass their idle hours, many went online seeking information on how to earn money through digital trading.
Online brokerages targeted them, offering incentives and easy-to-understand lessons. For instance, 5paisa.com has a ‘5paisa School’ that offers courses on the equity markets, mutual funds, technical analysis, taxation etc.
The incentives offered by brokerages include sops such as free ETFs, refunds, cash award for referrals, free service, and unlimited or discounted trading.
Vital questions regarding digital trading
What all this means is that thanks to the pandemic, thousands of digitally enabled people are today also digitally enabled investors who can start buying or selling at their convenience.
But as Dhirendra Kumar, CEO of financial advisor Value Research asks in his company’s newsletter, the ‘digital miracle’ may have made investing faster and more convenient, but has it made it better? He defines ‘better’ by asking the following questions:
- Are returns higher, as compared to conventional trading?
- Do investors make more savings?
- Do they face less risk?
- Do they face less volatility?
- Is digital trading less stressful?
Needless to say, none of this is guaranteed by online trading. As Kumar cautions, while digital tools can help a skilled investor “do much more and much better”, these can boomerang in the hands of a novice. Moreover, he says, the new-age online investor can be distracted or misled by the overwhelming flow of information on television and social media, which can again prove counterproductive for a beginner.
“Unfortunately, everyone begins as a novice and the digital era has brought with it more ways of going wrong than ever,” says Kumar.
If you are beginner, remember that the basics of investing remain the same: you need to know the fundamentals of the company you are investing in, have a financial goal, ideally consult an authorised financial advisor to guide you and help you seek out opportunities, and you must have patience.
In conclusion, maybe you should also bear in mind what Kumar of Value Research says what investing is all about. "The central part of investing is that you need to spend less. You need to deprive yourself a little bit for many years so that eventually you will have a lot more to spend.” Here's an interesting piece for you to read about how to turn stock market volatility into an investment opportunity.
Disclaimer: This article is intended for general information purposes only and should not be construed as investment or legal advice. You should separately obtain independent advice when making decisions in these areas.