Asymmetry between market access, market capability

Investment: Short vs long term

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Imagine two young Indian households, both channelling their savings into the equity markets to seek returns. One invests in diversified equity mutual funds, seeking to participate in India’s long-term growth and benefit from compounding. The other turns to equity derivatives, seeking to profit from short-term market movements.Both are participating in the financial market. But they are pursuing fundamentally different objectives.SEBI’s latest study on equity derivatives illustrates the consequences. In FY26, 87.5 lakh individual traders participated in equity derivatives, of whom 87.7 per cent incurred losses. Their aggregate net loss was ₹91,685 crore, while the average loss among loss-makers was ₹1.17 lakh.There is some improvement. The proportion of loss-makers declined from 90.9 per cent in FY25 to 87.7 per cent in FY26. However, active individual traders also declined 18 per cent, new entrants fell 40 per cent, and exits increased 76 per cent. The lower loss ratio, therefore, needs to be read alongside a sharp contraction in participation rather than as evidence of a fundamental improvement in retail trading outcomes.The competitive landscape is equally revealing. Individual traders recorded ₹72,243 crore of gross trading losses in FY26, compared with gross profits of ₹44,483 crore for proprietary traders and ₹13,896 crore for FPIs. Importantly, 99 per cent of FPI and proprietary profits came from entities using algorithmic orders.This does not establish a simple transfer of retail losses to institutions. It does, however, highlight an important asymmetry in the trading environment. Individual participants may be competing against sophisticated market participants using algorithms, quantitative models, faster execution and professional risk-management systems.Market access may be equal; market capability is not.Age profileThe demographic profile makes the findings even more consequential. Forty-three per cent of individual derivatives traders are below the age of 30, compared with 31 per cent in FY22. Among these younger traders, 89 per cent were loss-makers.This matters because young investors possess the most valuable asset in finance: time.A 25-year-old has decades in which regular savings and reinvested returns can compound. Yet the growing emphasis on short-term trading risks encouraging the generation with the longest investment horizon to adopt the shortest investment horizon — focusing on the next expiry rather than the next decade.There is, however, another important story unfolding alongside the derivatives boom: the expansion of mutual-fund investing.According to AMFI total mutual-fund folios increased from 10.55 crore in July 2021 to 28.09 crore in July 2026, while retail-oriented equity, hybrid and solution-oriented schemes accounted for around 21.40 crore folios. Monthly SIP contributions reached ₹31,961 crore in July 2026.These numbers represent a different relationship with the market. A mutual fund SIP does not require an investor to forecast the next market movement. It encourages regular investment across market cycles, giving long-term ownership and compounding a greater role in wealth creation.One approach seeks to predict prices; the other seeks to participate in economic growth.India has succeeded in extending financial-market access to the last mile. The next challenge is to extend financial capability with equal determination. Financial inclusion should not be measured only by the number of trading accounts opened, but by whether households are accumulating productive financial assets.This is not an argument against derivatives. They serve legitimate purposes in hedging and risk management, while equity investing also carries market risk. The issue is suitability: whether leveraged, short-term trading is an appropriate wealth-building strategy for an ordinary household.There are signs that some speculative activity is moderating. The share of index-options turnover occurring on the day of expiry declined from 70 per cent in FY25 to 59 per cent in FY26.But regulation can address excesses; it cannot substitute for investment discipline.The success of India’s financialization should therefore not be measured merely by trading volumes or derivatives turnover. It should be measured by how many households become long-term owners of productive financial assets and give their wealth the time to compound.The writer is Professor of Finance, IMT GhaziabadPublished on August 27, 2026