Faith versus forethought: India’s amateur investors are taking outsized risks

America’s whipsawing tariff policies might have unsettled international markets. But India’s sell-off has deeper and more disturbing roots—such as global funds heading for the exit. They have taken out over $15 billion so far this year. Indian stock markets have lost $1.3 trillion in value since last September and the Nifty 50 is down about 14%.

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The slide in the index would be far worse if not for the fact that domestic investors have been on the other side of this trade. They have been steadily buying what foreigners sell—and that’s exactly why we should worry.

India is in the middle of a share-buying revolution. Between 2023 and 2024, the number of retail brokerage accounts increased by a third. The National Stock Exchange said in January that new investor registrations are thrice as many as before the pandemic. A country that has about 320 million households now has some 110 million unique investors.

It’s these new investors’ savings that are on the other side of the trade. Domestic institutions are buying, of course, but so are retail investors through ‘systematic investment plans’ (SIPs). In 2024, SIPs poured about $2.7 billion a month into the markets. That rate accelerated after October, just as foreign investors began their stampede out of India.

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One way of looking at this is that regular citizens have their ears close to the ground, and therefore know something the ‘smart money’ doesn’t. You often hear praise about the resilience of small investors and tributes to their faith in the India growth story.

That’s nice, if it’s true. But what if it isn’t? When one side of a trade has the entire world to invest in, along with time and resources to analyse fundamentals, while the other side has faith and hope, who do you think is getting the better deal?

Some people are beginning to worry. Billionaire banker Uday Kotak asked recently: “Should we continue encouraging retail investors [in India] to keep buying? [They] are funnelling money into [Indian] equities daily… Money from individuals from Lucknow to Coimbatore is flowing to Boston and Tokyo.” The economy, he warned, was “over-financialized” for its level of development, with investors moving their savings into equities “without understanding valuations.”

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Voices are preaching caution even in perennially optimistic New Delhi. This year’s Economic Survey argued that financial markets shouldn’t grow faster than the rest of the economy. In last year’s edition, officials had warned that sustained losses would lead to investors feeling cheated and refusing to return to capital markets.

Meanwhile, India’s growth momentum has weakened. In a country so dependent on consumer demand, market downturns have a disproportionate wealth effect, weighing further on the economy. But if small investors who felt betrayed wind up sitting on their savings for a generation, it would be even worse.

Political leaders must immediately stop mythologizing the retail investment revolution. It isn’t because of some numinous faith in India; people are buying stocks because apps and SIPs have made it much easier and because they don’t have anywhere else to put their money. What should leaders be doing to change this?

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An earlier generation might have bought a home; but now real estate is expensive, with a high entry bar and low returns. Bank deposits, thanks to an inefficient banking sector, often give you negative real rates on your money. And, for the past year, regulators have banned funds that invest in markets outside the country from adding new subscribers. Indians have been locked into their stock market.

Financial inclusion is great, and India’s drastic reduction of the transaction costs associated with saving and investment is a major achievement. Regulators have spent decades trying to get more people from small-town and rural areas into the market.

But ordinary Indians should be given options. Whether through more comprehensive social security or higher-return bank deposits, policymakers should give consumers a way to save that offers a share in growth, a hedge against inflation and doesn’t expose them to risks they don’t have the bandwidth to process.

People who lose their savings also lose trust in the system. That’s any politician’s worst nightmare and leaders should worry it’s coming true. ©Bloomberg