RISK IS THRILLING FOR SOME INVESTORS

When investors hear the line that certain 'investments are subject to market risks', it means 'danger or loss' for most of them, but a few associate the word 'risk' with 'thrill or opportunity' as well. These are the findings of a new survey, commissioned by capital markets regulator Sebi, which also found that investors worry more about market risks like volatility and financial losses rather than operational risks such as corporate governance issues and insider trading. Risk, returns and liquidity perceptions demonstrates that while individual retail investors are surprisingly rational about certain aspects of financial decision-making, they can also be completely irrational regarding a number of other market aspects. The word 'risk' itself has different meanings for various investors. When the word 'risk' is mentioned, 'danger' is the first word that comes to the minds of 33 per cent of the investors surveyed and 23 per cent think of 'loss' while yet another 20 per cent think of it as 'uncertainty', as per the survey. Perceptions that risk can be thrilling (16 per cent) or can lead to opportunities (8 per cent) are limited to less than a quarter of the investor base. According to investor perceptions, volatility is the most important 'problem' associated with the stock markets while the fear of losing money and the lack of guaranteed returns are also primary reasons of concern. It seems that investors are interested in participating in the securities markets and yet hope to avoid any market risk. On the other hand, they are willing to ignore non- systematic or operational risks like corporate governance issues, potential accounting fraud or trading on inside information, and thus, show a biased view of risk of financial securities. The survey was commissioned in 2015 and got completed last year, while its results were released today by the capital markets regulator. Nielsen, a global leader in primary research, has conducted and analysed this Sebi survey. Sebi said the survey first listed a set of 2,04,694 households 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. The data was used to create an estimate of the total number of investing households at the end of 2015.

According to the survey, just 15 per cent respondents participate in the securities market. Interestingly, middle- income groups save more as a percentage of their annual income than the highest income groups. Primary motivation for investing is capital gains, closely followed by lifestyle improvement plans. 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. It said that 23 per cent of government employees surveyed and only 11 per cent of private employees are investors. Besides, 17.5 per cent business owners are also investors. While 15 per cent of survey participants are investors, just 18 per cent of these have invested in initial public offers (IPOs). Thus, a mere 3 per cent of all survey participants have invested in IPOs. Over 72 per cent of regular IPO investors find the IPO process challenging. The book building process, the time taken for allocation and the handing over of cheques are the most critical roadblocks. Newspapers and television continue to be the top two sources of IPO-related news. The survey said that perceptions of risk, returns and liquidity about investment instruments are not always in line with their actual risk/return/liquidity profile. 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. Most market participants focus on the secondary markets alone, except depository participants (DPs) who usually participate in both. Unsurprisingly, DPs also have the largest customer base, with brokers following them in size, while most authorised persons and mutual fund agents have a smaller customer base. Most market participants (63 per cent) 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 per cent) depository participants and only 51 per cent sub-brokers and mutual fund agents are in the business for over 10 years. Market participants' perceptions of risk, returns and time horizons for plain vanilla instruments like equities, mutual funds and bonds are in line with reality. The survey said that newspapers are the most visible source of communication from the Sebi. Overall awareness levels concerning rules and regulations pertaining to the securities markets are high among the investor community.