India’s Demat Boom: What it means for you as an investor?

You’ve probably heard a lot about India’s Demat boom i.e. people investing in the stock market lately, right? Well, India is currently experiencing a huge boom in the number of investors opening demat accounts to invest in stocks. You might be wondering, “What does this mean for me? Should I jump in, too?” 

Let me break it down so that you can understand what’s going on and what to keep in mind if you’re thinking about taking the plunge into stock market investing.

A Quick Look at Zerodha’s Numbers

You know that something big is happening when the founder of a company like Zerodha, one of India’s largest stockbrokers, can boast about huge profits. Nithin Kamath, the founder, recently tweeted that Zerodha made a 62% increase in profits in FY24. That’s massive, right? But that’s not all. He also shared that Zerodha customers hold investments worth over INR 5.66 lakh crore, with unrealized gains of more than INR 1 lakh crore. 

What’s the takeaway here? 

Simply put, more and more people are investing in the stock market, and they’re making a lot of money. But there’s more to the story than just profits. There’s a risk factor you need to be aware of as well.

India’s Demat Boom: Why Are So Many People Opening Demat Accounts?

Between January 2023 and August 2024, India saw an incredible 60 million new demat accounts being opened. If you don’t know, a Demat account is what you need to hold your shares electronically. By August 2024, the total number of Demat accounts in India was a whopping 171 million! That’s a huge leap from just 23.3 million demat accounts a decade ago. 

Can you imagine the growth? By the way, what’s causing this surge? 

Well, it’s partly because of the rising stock market, which has been growing by 30% annually over the last three years. Naturally, people are attracted to the idea of making quick money. Plus, technology has made investing super easy. These days, anyone with a smartphone can open a Demat account and start investing. Broking apps have become so user-friendly and addictive, almost like a game, that even someone who’s 80 years old can invest without any hassle.

It’s Not Just the Big Cities Anymore

Earlier, stock market investing was mostly popular in states like Maharashtra and Gujarat. But now, it’s spreading everywhere! In September 2024, the largest number of investors came from Uttar Pradesh and Bihar states that traditionally weren’t huge in the stock market scene. In fact, Uttar Pradesh saw a 47% increase in investors, and Bihar saw a 48% rise compared to the previous year.

Here is the data on the State-wise count of demat investors sourced from BSE–

This shows that stock market fever is no longer limited to certain parts of India; it’s sweeping across the country. The ease of accessing investment platforms via smartphones and the excitement of the booming market are playing a huge role in this shift.

CDSL vs. NSDL: What’s the Difference?

You’ve probably heard of CDSL and NSDL. Both are depositories where your demat accounts are held, but they serve slightly different purposes. CDSL manages 78% of India’s demat accounts, but NSDL dominates when it comes to the actual value of assets held. NSDL’s assets under custody (AUC) stand at a whopping USD 5.9 trillion, while CDSL’s AUC is USD 928 billion.

The Hidden Costs of Stock Market Trading

Now, you might be thinking, “This sounds too good to be true. What’s the catch?” Well, there are some costs involved, but they’re pretty low compared to the past. For instance, the transaction fees for buying and selling stocks are now very minimal. Many brokers charge only a tiny percentage or a flat fee for transactions. For example, if your trade is worth INR 1 lakh, you might only pay a flat fee of INR 20!

And guess what? 

For equity delivery trades (that means holding stocks for long-term investment), platforms like Zerodha offer zero brokerage fees. So yes, the costs of trading are low, but you need to be careful. Don’t get caught up in the hype without fully understanding the risks.

More IPOs, More Risk-Takers

Another reason people are flocking to open demat accounts is to participate in Initial Public Offerings (IPOs). In 2024, 56 IPOs have raised a massive INR 65,000 crore so far. That’s a huge increase from 2023 when there were only 20 IPOs in the first eight months, raising just over INR 15,000 crore.

What does this tell you? 

People are becoming more willing to take risks with their investments, especially when it comes to new companies entering the stock market. It’s exciting, but keep in mind that IPOs are often unpredictable. The stock might soar, or it might flop. It’s a gamble…

Mutual Funds vs Direct Stock Investing: Which is Better?

With so many people investing directly in stocks, you might be thinking, “What happens to mutual funds?” After all, mutual funds are managed by professional fund managers who decide where to invest your money for you. Should you be managing your own investments instead?

The short answer is- it depends. Yeah! It depends on the situation. 

Direct stock investing can be thrilling, but it also comes with a lot of risks. If you’re not careful, you could lose a lot of money. On the other hand, mutual funds offer professional management, diversification (which means spreading out your money to reduce risk), and tax efficiency.

Ajit Menon, CEO of PGIM India Mutual Fund, points out that direct investing can lead to permanent loss of capital if you don’t know what you’re doing. He advises that most people will probably balance their portfolios, giving some money to professional fund managers while trying their hand at direct investing.

What about SIPs?

SIP (Systematic Investment Plans) have become a popular way to invest regularly in mutual funds. But with the rise of direct stock investing, will SIPs lose their charm? Probably not! Menon suggests that while some people might focus more on direct stock investing during market booms, SIPs will still be a growth business because they provide a simpler, more hands-off approach to investing.

The Final Word: What Should You Do?

So, what’s the big message here? India’s demat boom shows that more people are willing to take on stock market risks. But don’t rush into it without a plan. Direct stock investing can be profitable, but it’s also risky. If you don’t have the time, knowledge, or resources to track the market, mutual funds or SIPs might be a better option for you. They offer the safety of professional management and diversification.

At the end of the day, it’s all about finding the right balance for your comfort and financial goals. You don’t need to go all-in on one approach. You can have some money in direct stocks and the rest in mutual funds. After all, as India’s economy continues to grow and per capita income rises, both investment options are expected to see strong growth. But remember, no matter how exciting stock market investing seems, always be aware of the risks involved. Trust plays a big role in long-term success, so choose wisely!

In short, don’t get carried away by the stock market’s current highs. Keep your feet on the ground, do your homework, and find an investment strategy that works best for you 🙂