Derivatives take retail fancy

Share of futures and options in retail turnover has doubled, while that of commodities has halved since 2013

The share of derivatives has gone up sharply in retail trading pie, while that of commodities has been going downwards. Meanwhile, cash trading turnover has remained more or less stagnant.

Increase in risk appetite amid sharp increase in volatility is seen driving individual investors towards the futures and options (F&O) market. The decrease in retail volumes in the commodity space has coincided with the Rs 5,600-crore National Spot Exchange Limited (NSEL) scam in 2013.

Average monthly retail in 2016 is at Rs 27.8 lakh crore, double compared to Rs 14 lakh crore in 2013, data compiled by domestic brokerage Motial Oswal Financial Services show. The F&O segment now accounts for 78 per cent of the total retail turnover against 55 per cent in 2013.

"Risk appetite of investors goes up whenever markets start giving positive returns. Hence, the recent surge in the markets could have led to this rise. Further, awareness among investors about F&O market is also increasing day by day," said B Gop Kumar, chief executive officer, Reliance Money.

This renewed interest of retail investors in derivatives comes at a time when their participation in the cash segment equity markets has stagnated. The average monthly turnover of individual investors during this year is Rs 2.3 lakh crore. It stood at Rs 2.1 lakh crore in 2015 and Rs 1.94 lakh crore in 2014, data showed.

Interestingly, the retail participation in the commodity segment has consistently plummeted since July 2013 NSEL scam came to light. The average retail turnover in commodity segment for the calendar year so far has been Rs 5.6 lakh crore, less than half compared to Rs 13.9 lakh crore during 2012.

"Commodity markets are going through a tough phase as far as retail participation is concerned. The participation has declined consistently in the past few years," said Prasanth Prabhakaran, president of retail broking at India Infoline.

He added that the only way to bring back the faith of retail investors in commodity markets is through regulatory overhaul. "The most important step in the direction would be to merge the commodity and equity exchanges and provide single ledger system for the investors," Prabhakaran added.

Experts said this priority of investors towards derivative markets has a flip side as well.

Unlike equities, derivatives are more complex products and need special understanding. "It would be dangerous if a retail investor participates in F&O markets without understanding the product. In this aspect, the brokerages need to be proactive and make sure they sell these complex products to only those investors who have a thorough understanding," Kumar added.

In order to discourage investors with less awareness from participating in the F&O markets, market regulator had increased the minimum contract size of participation to Rs 5 lakh crore from Rs two lakh crore. In 2012, the regulator got rid of the mini derivative contracts that were being offered to get more retail investors. The minimum ticket size for the mini derivative contracts was Rs 1 lakh.

The overall retail participation in the markets went up during the period on account of positive returns from equities and derivatives compared to other asset classes. The participation in the cash segment hasn't increased over the years as investors are increasingly taking equities exposure through the mutual fund route.