Rising concerns over derivatives trading

Only 11% of the 45.24 lakh individual traders in the F&O segment made profits last year. There was an exponential increase in the F&O segment participation during the pandemic, with the total number of unique individual traders increasing by over 500% from 7.1 lakh in FY19

New Delhi: Cautioning against household savings getting invested in futures and options trade, experts said there was a need to reconsider sachetisation of F&O trade because it requires different financial literacy. Speaking at the CII’s Annual Business Summit, 2024, V Anantha Nageswaran, Chief Economic Advisor (CEA) said whenever financial sector development precedes national development the story hasn’t ended well for other countries as well.

“Asian crisis 1997-98 is a very important example,” he said. “When we take pride in the fact that we have the world’s largest trading volume in futures and options (F&O), we need to ask ourselves is that a sign of progress or a sign of concern,” the CEA said.

He said the financial sector has a responsibility to ensure that capital market grows in those areas where we can actually harness Indian household savings for productive purposes.

“Many of the people currently engaged in the market do not understand them. The sachetisation of futures and options is something that we need to reconsider because financial literacy that is required for trading stocks is very different for trading futures and options,” Nageswaran said. Sachetisation refers to process of making financial products and services available in smaller, more manageable packets.

As per government data, the net household savings declined sharply by Rs9 lakh crore in three years to Rs14.16 lakh crore at the end of 2022-23 fiscal. The data showed that the investment in mutual funds (MFs) almost trebled to Rs1.79 lakh crore in 2022-23 in three years from Rs64,084 crore in 2020-21. The household investment in shares and debentures almost doubled to Rs2.06 lakh crore in 2022-23 from Rs1.07 lakh crore in three years from 2020-21.

Finance Minister Nirmala Sitharaman had last week cautioned against an ‘unchecked explosion’ in retail F&O trading saying it may potentially create problems in household finances. “Household finances have made a generational shift. We want to safeguard them,” she said, while urging exchanges NSE, BSE and market regulator Sebi to work together and come out with robust compliances and regulatory standards to safeguard investors’ interests,” Sitharaman had said.

In November, last year, Sebi chairperson Madhabi Puri Buch said she was confused and surprised at investor interest in F&O trade despite 90 per cent of individuals losing money in the segment. Buch said there is a need for investors to look at the long term and added that chances of making inflation-beating returns are much brighter through this strategy. As per research by the capital markets regulator Sebi last year, only 11 per cent of the 45.24 lakh individual traders in the F&O segment made profits. There was an exponential increase in the F&O segment participation during the pandemic, with the total number of unique individual traders increasing by over 500 per cent from 7.1 lakh in FY19.