The torrent of expert warnings against retail participation in F&O (Futures and Options) keeps growing in the country with the Reserve Bank of India joining the chorus with a report that red flagged the huge retail participation in this segment and warned that they could be caught unawares by sudden changes in the market.
The RBI’s Financial Stability Report (FSR) which is published twice a year said, “…the rapid rise in F&O volumes in recent years could pose several challenges: retail investors could be impacted by sudden movements in markets without proper risk management and this could have knock-on effects on cash market; rise in popularity of shorter-duration options in indices with few stocks and high volatility could amplify leverage…”
Investor protection paramount
“Since derivatives are more complex than the underlying, investor protection is a key regulatory imperative,” the report added.
However, RBI is not the first agency that has issued warnings against this growing trend in reckless and extremely risky investing by individual investors who are simply adopting it after a fashion in the hope of making windfall profits.
Tell-tale data
Many pieces of tell-tale data show how the lure of hefty profits is attracting lay investors to this speculative segment. The number of retail investors jumped from 65 lakh in FY23 to 95.7 lakh in FY24 – a rise of 42.8%.
The NSE and BSE have now turned into the top two stock exchanges in the world in terms of number of derivatives contracts traded. India accounts for about a stupendous 85% of the global volume.
Earlier a research report by market regulator SEBI (Securities and Exchange Board of India) research published in January 2023 stated that out of every 100 individual investors in the F&O segment as many as 89 made losses in FY19 and FY22.
The average loss in FY22 was Rs 1.1 lakh.
F&O trading: NSE chief raised concern
The voices against retail participation in this segment includes heavyweights such as the MD of NSE Ashish Kumar Chauhan.
“Retail investors should not participate in F&O trading. They should invest in equities through mutual fund route,” Chauhan said recently.
Even Union Finance Minister Nirmala Sitharaman spoke out against this trend.
Earlier this month, RBI governor Shatikanta Das said, “The volumes in the F&O market are very large, perhaps larger than the nominal GDP. We have discussed the matter with Sebi, and they are dealing with it.”
In May V. Anantha Nageswaran, chief economic adviser in the finance ministry, too, cautioned against the ballooning trades in F&O.
Expert group
Recently, according to a report, SEBI set up an expert group to suggest ways of stepping up investor protection and improve risk management in equity derivatives. It has 15 members and is led by former RBI executive director G Padmanabhan and includes experts from broking houses, stock exchanges, clearing corporations, AMCs and academicians in finance and risk management from the IIMs.
F&O trading: Common investors have jumped in the F&O ring making India the undisputed global leader in this extremely risky derivatives trading. RBI thinks such reckless behaviour could cause them serious financial injury. Personal Finance Business News – Personal Finance News, Share Market News, BSE/NSE News, Stock Exchange News Today
