Digital age opportunities, challenges for retail investors

The COVID-19 pandemic brought with it a surge in retail investor participation in the Indian markets. Various factors contributed to this growth, including increased leisure time during lockdowns and a significant shift toward digital adoption. Online trading and investment platforms played a crucial role in transforming the landscape for Indian investors. With easy access to smartphones and mobile internet, even investors from Tier II and III cities could actively engage in financial markets.

The accessibility of mobile apps from brokers made it possible for individuals without computers at home to easily invest and trade. Instant account opening facilitated quick onboarding for investors, even in remote areas. As a result, the number of retail investors in the cash segment saw a remarkable increase, rising from around 3 million in January 2020 to a peak of 11.7 million in January 2022. Although the numbers have since come down from the peak, investments through mutual funds have remained robust.

Monthly systematic investment plans (SIPs) flows reached Rs 14,734 crore in June 2023, and the number of SIP accounts surpassed 6.65 crore. In 2020 beginning, monthly SIP flows used to be around Rs 8,500 crores and the number of SIP accounts was 3 crore.

Social media platforms have played a big role in democratizing access to markets by providing retail investors with information and advice. Financial influencers, who offer insights on various financial topics, have gained popularity, with millions of followers. The influence of these ‘influencers’ has played a part in driving interest in new asset classes as well, such as peer-to-peer lending, invoice discounting, and cryptocurrencies. These products have seen higher adoption despite their risky nature and higher tax rates. According to a survey done by Seychelles-based cryptocurrency exchange, KuCoin in 2022, over 115 million Indians had invested in cryptocurrencies. This is similar to the number of Demat accounts in the country. It shows that the adoption of new ideas among the retail community is quick.

Meanwhile, in the wealth management industry, advancements in artificial intelligence and machine learning have given rise to Robo-advisors. These digital platforms provide investment advice and portfolio management with little to no human intervention, making them less susceptible to behavioral biases that can affect human analysts. Robo-advisors offer lower fees compared to traditional financial advisors, allowing them to extend their services to a larger client base. Scalability is also easier as financial advisors can only handle a certain number of clients at a time. There are no such constraints with machines.

However, Robo-advisors also face certain drawbacks, such as the lack of human interaction, which may make some investors uncomfortable with fully entrusting their decisions to machines. Additionally, Robo-advisors may not cater to certain financial assets which have low liquidity and fewer data, limiting their scope of investment recommendations.

The investment landscape has undergone a significant transformation with the advent of technology. However, along with the opportunities it brings, there are also challenges and risks that need to be addressed. One concern that will always remain will be the security of data. Theft of investment data can have repercussions not just for individual investors but also for broader markets. Besides, volatility might increase if more investors follow the same set of finance influencers and the ideas and strategies that they present. Damages from technical glitches could also potentially increase if more capital is deployed through algorithms.

Investment firms need to be proactive to mitigate these risks. They should invest in robust cybersecurity measures, encryption protocols and regular audits to safeguard sensitive information. To prevent excessive volatility in markets, regulators should scrutinize players spreading false information. It is essential for investors to diversify their sources of information as well. Relying on multiple reputable sources for investment insights and conducting thorough research before making decisions can help prevent herd-like behaviour.

Lastly, to mitigate damages from technical glitches, investment firms should maintain a comprehensive risk management framework. Regular stress testing of algorithms and contingency plans for potential failures can minimize the impact of such events and protect investors’ interests. Moreover, it’s crucial to strike a balance between algorithmic and human decision-making, ensuring that human oversight remains present in critical processes. By adopting these measures, market participants can navigate the changing investment landscape while effectively managing the associated risks.

Author is  Chief Executive Officer, TIW Capital, Views are personal.

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