What does the surge in demat accounts in India indicate?

393 What does the surge in demat accounts in India indicate?

Ask any retail broker and the immediate response is that there has been a surge in trading accounts and demat accounts in the last one year or so. On the one hand, people blame lack of other investment options for this sudden interest in equities. There are the sceptics who keep warning us that a surge in demat accounts may not be great news as it exposes too many retail investors to the undiluted risks of equities. Then there are the enthusiasts who believe that Indian equity investing may be finally coming of age. The trust lies somewhere in between. For now, let us leave the rhetoric aside and purely focus on the numbers.

Record number of demat accounts in FY21

In FY20, CDSL and NSDL put together opened about 49 lakh demat accounts. This was slightly higher than the average of 43 lakh demat accounts annually opened in the previous five years. But all laws of averages appeared to go for a toss in the fiscal year 2020-21. A total of 1.42 crore demat accounts were opened at NSDL and CDSL put together in the financial year 2020-21 and that trend is continuing in the first 2 months of FY22 also. Clearly, the appetite of the Indian equity investor is not done and dusted. That is a whopping 3-fold increase in fresh demat accounts in just one year. Remember, we are talking of a highly matured demat market like India where 99.4% of the shares are in demat mode already and nearly 100% of all trades on the stock exchanges happens and settles only in demat form.

If you break up the total number of demat accounts opened in FY21, March alone saw 19 lakh fresh demat accounts being opened. This is the record for a single month demat account openings. Now, each demat account is normally, or at least predominantly, backed by a trading account also. So, it is hardly surprising that most brokers in India have been reporting a surge in the number of trading accounts opened with them. What exactly has led to this surge in demat and trading accounts in the last one year?

Why this sudden surge in demat accounts in last one year?

There are no simple answers but, obviously, there has been a confluence of factors at play. Here is a quick summary.

a) The surge in demat accounts was largely triggered by the TINA factor or There is No Alternative. With government aggressive cutting rates and bank deposits and small

savings also becoming non-viable investments, there was little choice but to look at equities.

b) The sharp fall in early 2020 due to COVID-19 may have spooked markets but the recovery was equally rapid. Markets are now convinced that the overall equity story of India remains intact as India gradually transforms into a $5 trillion economy.

c) When as new trend is seen in markets, the millennials can never be too far behind. It was observed that an increasing number of millennials started moving towards dual or multiple income sources, and stock market seemed to be a logical investment option. After all, where else can you expect quick returns and long term wealth creation?

d) To the credit of the government and SEBI, many compliance requirements were made simpler. Easier KYC norms, greater internet penetration and affordable devices and technology enabled easy access to mobile phones, broadband and consequently increased the financialization of savings. Also, the focus on Aadhar and direct benefit transfers through bank accounts have helped in a big way.

e) Information has become more easily available and a new net savvy generation is a lot more comfortable trading in equity markets armed with information and insights gleaned from the internet. Nor surprisingly, many of the millennials are leveraging capital markets, especially over the long term, to grow and reach their financial goals.

f) Finally, there is a silent trend that more and more investors from smaller towns like Nashik, Jaipur, Guntur, Patna, Kannur and Nainital have got into the equity cult in the year thanks to easy access to online demat accounts. Geography is no longer a constraint for traders and investors in equities.

Is this trend of demat surge positive?

For a long time, equity as an asset class was never the preferred choice for the Indian investor in general. That was as long as real estate and bank FDs were offering obscenely high rates of return. That is history; and that trend is not coming back in a hurry. Investors, especially the younger ones, realize that the biggest risk they take today is not taking enough risk. Equity can be like slotting machine in the short run but it like a weighing machine in the long run. It is this long run game that the surge in demat accounts reflect.

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