'Retail Investors Need To Realise That Markets Reap Rewards In Long Term'

In a free-wheeling interview with BW Businessworld, Ashish Chauhan, MD & CEO of the Bombay Stock Exchange, talks about how first time investors need to approach the stock market, how BSE aims to educate & empower investors to make wise decisions, and how the BSE STAR MF platform will change the way we invest in Mutual Funds in the times to come.

What advice would you give to a first time retail investor in the stock markets?
Retail investors are usually middle class, and their first motive is usually capital protection - with growth being a secondary motive. So their strategies and actions have to match that intent of capital preservation. Many times, retail investors get excited and get involved in derivative strategies or small penny stocks because they are 'supposed to go up', or they trade on tips. Even TV experts that advise them to 'buy in the morning and sell in the evening' can sway them. Sometimes, they might get lucky and make money in the initial stages, and other times they lose and go out fast. Retail investors need to realize that markets reap rewards in the long term, and you need to commit yourself to staying put for the long term. Else, retail investors end up trading a lot. It is good to trade frequently only if you are a professional trader! As a retail investor, you would be far better off understanding companies and their future prospects, assessing your portfolio periodically and weeding out non-performers when required. But if you stay put in the long run, markets will give you better returns - after all, the S&P BSE Sensex itself has given an 18-19 per cent annual return over 35 years! Nowadays, there are interesting options where you don't even need to have any expertise to invest - such as ETF's or Mutual Funds, for instance. In these investments, professionals figure out what to do and become managers for your money, just the way your doctor is in charge of your health! I have been a small investor myself, and so I know how tempting it is to trade and be swayed by all the advice you get - but it's important to know that the money is yours and not your brokers! So I've learned that it is best do as my one time boss used to tell me to do, that is - "Suno Sabki, Karo Apni!" After all, it is your money and you need to be responsible for preserving it, and if possible growing it - but you can't afford to lose it, because in the end, that money is there to fulfil your family's future needs!

In an ideal pyramid of investments, you should have a mix of instruments - starting with government bonds, corporate bonds and then equities… So basically, a retail investor should understand what his long term needs, medium term needs and short term needs are - and make allocations accordingly. Never, ever fall into the trap of making frequent changes! If required, seek the help of expert Financial Planners or Mutual Fund Managers.

Do you feel that Derivatives as a product are suitable for Retail Investors?
Derivative products are such that they are really meant for hedging and not speculation - and most retail investors don't understand that, and end up speculating. Also, derivatives by nature are very highly leveraged - even as high as 1000:1 in some cases! This can give you an exhilarating feeling, as your money can move very quickly. But it's important to understand that derivatives are very potent, and so should ideally be used by experts only. Internationally, there are some minimum qualifying criteria - either for net worth, or for educational qualification, or the like, in order to be able to trade in derivatives. India needs to replicate this, as a tremendous amount of mis-selling can otherwise take place. We are worried about mis-selling in insurance - for example, you may be a 20 year old who is being sold a 70 year old's insurance and vice versa! We also must be worried about derivatives mis-selling - or else we'll end up attracting people who don't understand the product fully, and this will end up hurting them in the long run. We should have checks and balances in place to ensure that only qualified and capable people end up participating in the derivatives market. So it's a matter of creating awareness about the risks involved, and also a matter of regulation.

Could you tell us about some Financial Literacy initiatives undertaken by BSE, such as the "BSE Institute"?
There are various steps that BSE has been taking towards enabling financial literacy, including setting up the BSE Institute. In fact, every year BSE conducts close to 2400 investor awareness workshops across the country - across metro cities, villages and towns. We've got 8-10 seminars practically taking place every day - some large and some small. Given the size of India, it is not easy to reach out to everyone, so we also use print media, SMS, emails and television channels - we sponsor a lot of television programs on investor awareness from our investor protection fund. We've also set up self-help groups for Women, where we teach them things like - how to invest, how to take microfinance loans, how to do your business well, and the like. Even schoolchildren and college going children are being trained by BSE regularly on things like how to become stockbrokers, or how to work under a stock broker, or how to work in a mutual fund company. We have partnerships with NSDC and Sector council in BFSI sector towards this as well. Even in kindergartens, we have customized board games which help create financial literacy at a very young age - such as a snakes and ladders game that teaches them that if you pay your premiums on time, you go up the ladder; and if you don't, you come down! So it gives you an idea that paying premiums on time is an important issue. There are many such board games that BSE has developed in partnership with international agencies, which aim to create awareness across the spectrum of financial planning. Even in our curriculums, we teach people History and Geography, but we don't teach them basic financial concepts - like how to balance your budget, how to understand your expenses, how to understand your revenues, how to plan for future goals etc. We've also taken up discussions with CBSE and ICSE on incorporating one chapter in each class on financial planning, using stories rather than difficult or detailed lessons. We also have a concept of 'Financial Olympiad' (today incidentally is the final). Almost 50,000 to 100,000 students participate in this Olympiad from across the country, and 100-150 students along with their teachers get shortlisted from amongst them, and are brought to Mumbai to do a final quiz on Financial Literacy at BSE's cost. More than anything, the entire experience of actually visiting the iconic BSE building is one that these students cherish! BSE Institute also has around 14 offices across the country, where they provide training sessions ranging from 1 hour to 2 years in duration, and they also run a B.Com in Financial Markets for several universities. So our activities are myriad; and they need to be so because India is such a diverse country consisting of people with so many different needs!

Could you throw some light on BSE Star MF and how it is influencing the ecosystem of Mutual Fund investing?
Internationally, it is a standard practice for investors to subscribe to Mutual Funds through IFA's (Independent Financial Advisors), and they are the ones who fill the forms and execute the investments. Around 5 years back, the exchanges were allowed to use their automation framework to allow people to invest into Mutual Funds. It started off as a small experiment, but today BSE accounts for almost 10% of the total Mutual Fund activity in the country! This trend has picked up heavily over the past few months. In fact, one day last month, we did 1000 Crores of transaction volume. Things are picking up pace for a few reasons. Primarily, because it is easy to perform Mutual Fund related activities using this framework, rather than using paper. Secondly, an individual IFA can become a member of the Star MF platform at zero cost. We provide detailed analytics to IFA's using the Morningstar platform, and also allow clients to see their portfolios online. Clients can even view their portfolios on their mobile. In a nutshell - BSE Star completely automates the entire process. Today we have one of the largest SIP framework in the country, with more than 4 Lac SIP's every month! Similarly, we have a framework called xSIP, which allows you to dynamically change over from one SIP from another immediately. Those are the kind of innovations BSE is working on. For instance, we have a liquid fund product which allows you to place an order at 1 pm on Friday, make your money earn returns over the weekend, and get auto credited back to your account on Monday. You can do this two way transaction for 1 day, 2 days or as many days as you like. It's like an airplane return ticket! Many shopkeepers, fund managers and large corporates who have overnight liquidity can even utilize this facility for parking funds overnight. You can select any liquid fund of your choice, as we are just an order routing mechanism. In fact, all the large distributors (such as IIFC, NJ or Bajaj) are part of this framework now, as it provides a network to connect the entire ecosystem. The paperwork for opening a BSE Star MF account is also very simple. But for me, it's still early days for the BSE star - it's growing very rapidly and has in fact gone from 2% to 10% penetration in the past year itself. I see this trend continuing.

Lastly, how do you believe we can resolve the inherent conflicts of interest that exist between brokers and clients, where brokers would like clients to trade more, but it's in the client's interest to stay put for the long term?
Firstly, clients need to be made aware that there are low risk assets available, which will not lose money for clients even if markets are not conducive. Clients who invested in these assets through market downturns will then speak to other clients on how they didn't lose money during markets falls, and awareness will spread… this is what I call 'learning by induction or by example'. Fortunately, the government has accepted our proposal for conducting auctions of government bonds through the exchanges, in the budget this year. We have of course been distributing a lot of PSU debt, which is tax free. In fact, 90-95 per cent of the public's debt collection over the past few years has been through BSE. So we are hugely into 'investments' and less into 'speculation', and we take it upon us to create awareness of the basic pyramid - starting from risk free instruments, PSU debt instruments which are government backed, to corporate bonds, equities and then speculative instruments. So in a nutshell, the best way to dissolve conflicts of interest is to actually create awareness of the pyramid of investing and risk free assets, and also ensure easy availability of these assets for the general investing public.