During the pandemic, people experienced, first-hand, the importance of liquidity. As per RBI’s household finance survey in 2017, Indians invest 84 percent of household wealth in real estate and other physical goods, with 11 percent in gold and a mere 5 percent in financial assets.
The pandemic showed us that a liquid emergency fund is critical in times of uncertainty. Thus, the rapid rise in the number of new DEMAT accounts in FY21 – three times as that of the previous financial year – is a clear indication of the increased interest in stock markets. Furthermore, the rise of new age discount brokerage firms that provide seamless digital and onboarding experiences, and a slew of steps taken by SEBI have played a crucial role in this.
Despite this massive increase, there is still a lot of ground to be covered to ensure active participation of retail investors in the stock markets who are otherwise comfortable with low yielding products such as fixed deposits/pension schemes or illiquid assets such as land or property.
How can the regulator/government encourage capital deployment, sustain interest, and help educate retail investors?
Here is our suggestion to the Finance Ministry to consider in Budget FY22-23
Treat Equity-based Exchange Traded Funds (ETF) on par with Equity-Linked Savings Schemes (ELSS) for Taxation
We recommend the following:
• This will provide a significant boost to small retail investors who are looking for alternative tax-benefits instruments under 80C provision of the Income Tax Act.
• ETFs are an excellent financial product for new retail investors and provide similar advantages to Mutual Funds but only at a fraction of costs. As they are passively managed, expense ratios of ETFs, in some cases, are 10x lesser than an average Mutual Fund.
• Provisions of the ELSS Scheme, 2005 (IT) should be made applicable for equity-based ETFs as mentioned in Rule-3 of the same act. For example, investment in ETFs need to be held for a minimum period of 3 years to avail the tax-benefit. This can be limited to be ETFs whose underlying assets are equity instruments.
• The direct benefit of this would be an increase in capital inflows in ETFs and subsequently improved market capitalisation. We expect at least a 3x increase in ETFs whose total AUM size was ~2.9Lakh crores at the end of FY21 (SEBI data) – 1/10th the size of the Mutual Fund industry. The more liquidity (higher AUM), the more effective ETFs are as an instrument.
• The indirect benefit of this would be an active usage of DEMAT accounts by retail investors to explore other stock market products as well. ETFs will break the entry-barrier for household investors to get started in investing in the markets. This will lead to higher market capitalisation of the Indian markets and more liquidity.
• This will provide the stock markets a booster-dose that the Mutual Funds industry got over a decade ago.
Budget outlook for Fintechs
Given Omicron’s wildfire, and Government’s continued initiatives on digitization, Fintechs will continue to benefit in the coming seasons as well. While the Budget is expected to be expansionary, with a focus on healthcare, infrastructure, and even green investments (read: EV industry), it is also necessary to help small businesses through various schemes and tax benefits.
For Fintech space, the following is our outlook for the budget
• Given the SMEs are embracing new age fintech/neo-bank firms such as Open, Razorpay, BharatPe etc., the Government should consider these firms to be an efficient channel to communicate with SMEs. The Government should consider using these firms to pass on direct benefits of tax, GST or any schemes to MSMEs. This will position the Fintech industry as trust-worthy, while providing a clear sight to the Government about the capital deployment and success of the schemes. This mention will also increase awareness of these platforms in the overall MSME sector.
• Government needs to continue to support new-age banking to emerge. A working parliamentary committee must be set up to work on a framework for a fully digital bank based on the recent whitepaper released by NITI Aayog. While the framework will certainly take time, a mention in the budget will give the emerging neo-banking sector a big boost.
(Kashyap Mahavadi is the Chief Executive Officer at Dinero - neobank)