The young investors gambling on Indian stocks

“How many of you want to be rich?” Hundreds of hands shoot up at a packed conference hall in the southern Indian city of Bengaluru.

The attendees are responding to Chandan Taparia, head of derivatives research at financial group Motilal Oswal. Roaming the stage as an array of technical charts pop up on screen, Taparia shares his market trading tricks to the fixated assembly of largely young Indian men hanging on his every word and intently jotting down strategies on a recent Sunday.

“Friends, if you follow this, trust me, you won’t lose,” Taparia notes in an aside. “If you don’t take risks, you cannot survive in the market, you cannot achieve your goal,” he adds. “If you win, you can rule the world.”

Taparia is one of a batch of financial influencers giving masterclasses to crowds of small-time derivatives dabblers, many of whom have travelled hundreds of miles to attend the Bharat Option Traders Summit. The nationwide series of day-long seminars, held in Indian regional languages across cities from Kochi to Lucknow, is tapping frenzied enthusiasm for trading among the country’s vast millennial and Gen Z cohort.

The scene speaks to the transformation that has recently taken place in Indian equity markets, once considered a barely investable backwater by global portfolio managers, as tens of millions of first-time domestic investors have piled into stocks and mutual funds.

Partly as a result, the benchmark Nifty 50 index of large Indian companies has doubled over the past five years, beating Japan’s resurgent Nikkei 225 and trouncing China’s Shanghai Composite. Not even America’s S&P 500, with six companies worth $1tn or more, has kept pace.

That outperformance has turned the country’s stocks into a favourite with global investors, who have increasingly shunned Chinese equities amid a domestic slowdown and geopolitical tensions with the US. Trading volumes of options on Indian equities have even eclipsed those on Wall Street stocks, while high-speed trading firm Jane Street reportedly made $1bn on Indian option trades last year, according to details revealed in a New York lawsuit.

But the surge in domestic investing has also pushed valuations ever higher, with the MSCI India index trading at an average 58 per cent premium to the MSCI Asia ex-Japan index over the past three years, according to asset manager Robeco. Some investors fear this rising enthusiasm is fuelling a speculative bubble that increasingly resembles a local version of the GameStop craze among US retail investors in 2021.

Despite living in the world’s fastest-growing large economy, hundreds of millions of Indians still face high unemployment, stagnant wages and a widening gulf with the country’s wealthy elite. This has made the prospect of fast fortunes, egged on by popular but largely unregulated “finfluencers”, all the more appealing.

A proliferation of discount brokerages, along with boredom during the Covid-19 lockdowns, have helped turn cheap zero-day options — derivatives that expire on the same day they are created — into the hottest ticket in the market after being introduced in India three years ago.

“There is a lot of speculative activity and it is sounding like a casino,” says Raamdeo Agrawal, chair of Motilal Oswal, which has millions of clients across India and co-sponsored the options summit roadshow. “The masses are really writing puts, selling puts, doing restructured calls. I mean, this is crazy stuff.”

Even Ashok Devanampriya, organiser of the Bharat Options Traders Summit and founder of Bengaluru-based Cautilya Capital, acknowledges that only 1 per cent of the crowd will ever make money.

India’s brokerages, bourses and government may be enjoying swelling fee income and tax revenues from this rapid expansion, but the country’s capital market watchdog has repeatedly sounded warnings over retail losses as the notional value of index options trades more than doubled in the past financial year to $907tn, according to exchange operator NSE.

Cheap access to options, whose leverage facilitates high exposure for modest outlay but magnifies the risk of losses, has resulted in what Ashish Gupta, chief investment officer at Mumbai-headquartered Axis Mutual Fund, calls the “gamification” of the stock market.

“In India, there’s no other form of legalised gambling,” Gupta says. His research found that active traders in the country shot up to 4mn last year from less than half a million before the pandemic. Most are below the age of 40 and hail largely from India’s smaller cities.

The addictive nature of those wagers, as well as the fantasy of quick riches, has enticed Indians such as Akash MB, a 30-year-old attendee at the Bengaluru summit. Two years ago he quit his sales job and began actively trading. “I want to make money and be profitable.”

His initial losses were the equivalent of $2,400, not far off India’s per capita gross domestic product. But he believes that with more experience and by doing options trading “we can make money today, we can make it now”.

Some veteran fund managers have looked upon the craze with disdain, including Rajiv Jain, founder of Florida-based GQG Partners with Indian investments valued at more than $20bn.

“There should be a crackdown in that area, just to take the air out,” Jain says. “What’s the benefit to society from all these young people speculating?”

Before India started dismantling its socialist economy in the 1990s there were few direct retail investors in its sluggish equity market. Even after the country opened up, public trust remained low after a spat of infamous stock scams.

But as India’s economy picked up its capital markets modernised, introducing innovations such as online trading and centralised clearing. Easily forged paper-share certificates are being replaced with electronic records of share ownership.

A small but expanding middle class with surplus savings has since led a historic democratisation of finance in the world’s most populous country, helped by rapid economic growth and the spread of bank accounts, mobile phones and low-cost brokerages. Generations of families who previously hid spare cash under the bed or bought gold, piled into stocks and mutual funds.

This has been helped by a publicity blitz. During last month’s T20 Cricket World Cup, which India won, breaks in play were dominated by adverts for low-cost brokerages and mutual funds featuring stars such as national team captain Rohit Sharma.

“A whole generation of people were sitting on the fence and thinking whether they should trade or not trade, and they’ve all jumped in,” says Nithin Kamath, co-founder of Zerodha, one of India’s largest low-cost brokerages with about Rs4.5tn assets under management. “The last four or five years have been phenomenal.”

The number of investor accounts in India has more than tripled to around 160mn since 2020, according to HSBC Asset Management. Mutual fund industry net assets under management doubled to Rs59tn ($706bn) in May.

The robust financial performance of Indian companies has also underpinned the market. Macquarie, the Australian bank and asset manager, has estimated Indian earnings per share will grow 14 per cent this year and next, outpacing other emerging markets. Indian debt is also becoming more accessible, with the inclusion of government bonds in JPMorgan’s emerging markets index for the first time last month set to attract billions of dollars in foreign inflows.

“If you have an EM mandate and you want to not upset your holders by being too big in China, you have relatively few options,” says Farida Khambata, co-founder of Washington-based investment firm Cartica Management. “You can be in Brazil for commodity markets, you can be in Korea and Taiwan as tech markets — and then you have the deep domestic market that India provides.”

That homegrown investor base means that India — once famously described by Morgan Stanley as one of the “Fragile Five” countries excessively dependent on foreign funds — is no longer as vulnerable to market corrections due to outflows, according to Khambata. “Earlier it was the ‘America sneezes, the world catches pneumonia’ story,” she says. “Having a domestic underpinning has completely changed the dynamic.”

India’s bourses have also introduced new derivative products and reduced minimum option trading sizes. That, along with demand for quick returns, has triggered a surge in retail players in those securities. The notional trading volumes of options on the Nifty 50 index averaged about $1.64tn a day this year, surpassing the S&P 500’s $1.44tn, according to Bank of America.

Overseas funds have taken notice and one Mumbai-based investment banker said Jane Street’s apparent success in India “had people sitting up and saying ‘shit there’s money to be made in India’”.

But some analysts fear the heady demand for Indian stocks could end in a severe correction that stops this financial democratisation in its tracks and scare away the new generation of investors, as the dotcom bust of the early 2000s did in Europe.

Andrei Stetsenko, a partner at New York-based Farley Capital, says inflows into Indian mutual funds could be hit “when the inevitable correction comes”.

But he was sceptical that this would derail the trajectory of Indian investing. Only 7 per cent of Indian household financial assets are held in equities or mutual funds, according to asset manager Polen Capital. That compares to 50 per cent in the US and 41 per cent in China. More than half remain in bank deposits, which shows there is still room for growth, Stetsenko argues.

“There will always be a risk of a correction,” he says. “The beauty of that is that it’s an opportunity to add to positions that you believe in.”

The Securities and Exchange Board of India is also growing concerned about the explosion of risk-taking.

One of the regulator’s targets is P R Sundar, a 60-year-old former maths teacher who became an unlikely options trading guru after he began regularly posting YouTube videos in 2020, during India’s first national Covid lockdown.

To their fans, finfluencers like Sundar — who has amassed more than 1mn followers and keeps a Rolls-Royce Phantom outside his office complex in Chennai — have helped demystify complex financial products, becoming aspirational role models to those looking to make fortunes in the market.

The son of an unskilled labourer, Sundar likes to reiterate his rags-to-riches story. He began investing in 2007 with savings of about $30,000 after returning to India following a 12-year teaching stint in Singapore. He now puts his net worth at about $12mn, which he attributes to his success in options and teaching novice traders.

His website advertises training sessions starting at about $700 and demands a minimum capital of $12,000 to participate, which Sundar says weeds out those who cannot afford the inherent market risks. He warns “the stock market is the hardest place to make easy money . . . there are so many people who can come to social media and say: ‘I’m a successful trader’, 95 per cent are frauds.”

Sundar himself has faced criticism that he only posts winning trades and makes more money through training programmes. He has dismissed those claims and says his share of earnings fluctuates. “If we keep on losing money, how can a person live my standard of living?” Sundar says, citing his love of flashy cars. “Lossmaking traders cannot afford to do that.”

Only registered analysts are authorised to provide financial recommendations. But many finfluencers, who ply their advice in hard-to-police chat groups, argue they are merely providing educational services, which are permitted.

Sebi imposed a settlement order of more than $700,000 on Sundar, his wife and their joint consultancy after accusing them of selling daily call option advice on the Telegram messaging app without regulatory registration.

Sundar and his wife agreed to a one-year trading ban without admitting or denying they had broken any laws. “I made some mistakes, I’m not denying that,” Sundar says. “But somehow I feel that the punishment given was much bigger.”

The watchdog has now engaged in a wider crackdown aimed at curbing the excess in derivatives, instructing brokerages like Zerodha to include warnings that nine out of 10 options traders end up losing money.

Those failed trades have had tragic consequences. In November, a 26-year-old software analyst killed himself by jumping from the 10th floor of his office building in Chennai. Police found he had taken a $12,000 bank loan and lost the money trading.

“The last thing you want is a new generation of 20-year-olds, whose first experience with the market will be linked to these instruments and then they get scarred potentially for life,” says Gupta at Axis Mutual Fund.

In early July, shares in listed mass-market brokerages, including Angel One and Motilal Oswal, fell after Sebi issued new rules mandating uniform charges that are not discounted for high volumes. Kamath at Zerodha says that will probably result in trading charges and the end of its zero-fee model. The regulator did not respond to a request for comment.

Whether Sebi’s actions will deter India’s army of youthful market players remains to be seen. “People are willing to take their chances” given the lack of opportunities in India, says Devanampriya of Cautilya Capital, arguing the odds of young Indians securing stable, but oversubscribed government jobs are even lower.

“When you become capable and become part of the 1 per cent elite club you will start making money and naturally over time you will become an investor.”

Hoping to join those ranks was Anand, a 23-year-old who had travelled more than 300 miles south from the city of Vijayapura to attend the Bengaluru options conference. “I’m a poor person,” he says during a break between seminars. “But I have a big dream for my life.”