The gamification of India’s investment landscape: Why investor protection must come first

India’s investment landscape is undergoing a seismic shift. Technology, innovation, and new distribution models have democratized access to capital markets, making investing easier and more accessible for retail investors. With more than 170 million Demat accounts as of August 2024 and rapid growth in domestic mutual fund’s AUMs driven by factors such as SIP (Systematic Investment Plan) investments consistently in the range of 20,000 to 25,000 crores monthly, the retailization of India’s financial markets has led to an empowered generation of investors eager to participate.

However, this increased access has been accompanied by a worrying trend: the gamification of investing, which has heightened risks for the average investor. It’s time to have an honest discussion about the reforms needed to ensure that financial innovation continues to serve investors’ interests without compromising their protection.

The boom in technology as reflected in smartphones available at affordable prices of as low as INR 7,000-8,000 and one of the cheapest costs for data in the world combined with the rise of fintech platforms have brought retail investors to the forefront of India’s financial markets. While this democratization has many benefits, it has also spurred a “gamification” of investing—where investment apps resemble video games more than serious financial tools.

With elements like rewards, badges, leaderboards, and frequent notifications, many platforms are designed to encourage frequent trading and exposure to higher-risk investments without carrying required disclosures for investors to fully understand the implications of their investment choices. In brief, many of these trading platforms are not offering sufficient investor education or warning about potential downsides.

Even some of the largest trading platforms in India are not immune to this. While their intuitive and easy-to-use platforms are enabling investment decisions to a new class of retail investors, the user interface is often designed to encourage activity. Data from the Securities and Exchange Board of India (SEBI) reveals that when it comes to derivatives 93% of retail traders incur a loss

This gamification is part of a larger trend of retailization, where financial products traditionally accessible only to sophisticated investors are now marketed directly to retail participants. From small-cap stocks to options trading and speculative investments in crypto assets, retail investors are now gaining access to complex financial instruments often without adequate risk assessment or education. In last several years, the Indian markets have done well, and the outperformance is even more pronounced in smaller stocks. This may have created an impression that more risk means better returns, swaying retail investors to become more aggressive in their portfolio decisions. The downside of gamification is that it often plays on cognitive biases—investors’ tendency toward overconfidence, fear of missing out (FOMO), and impulsive decision-making. Research shows that frequent trading is rarely in the best interest of retail investors. According to a 2021 study conducted by CFA Institute, high-frequency retail traders underperformed by an average of 4-5% annually, driven by poor decision-making, higher transaction costs, and taxes.

Moreover, the influence of social media and so-called “finfluencers” amplifies the risks. It is possible that just like in many other markets. many new retail investors in India get influenced in their investment decisions by stock tips from social media without fully understanding the fundamentals of what they are investing in. This leads to herd behavior, pushing investors to chase trends rather than make informed, long-term decisions. It has the potential to destabilize the market and erode investor trust in the long run.

To address these challenges, the regulatory environment should consider evolving to ensure investor protection in the age of gamified trading and social media influence.

Here are key changes that should be implemented:

Enhanced Disclosure Requirements and Risk Warnings: Some of this is already in place such as Risk Disclosures on Derivatives which highlights the SEBI study that 9 out of 10 individual traders in equity Futures and Options segment, incurred net losses and over and above the net trading losses incurred, loss makers expended an additional 28% of net trading losses as transaction costs.

However, there is scope to enhance this further and Investment platforms must adopt transparent disclosure practices that clearly communicate the risks associated with frequent trading and complex products. Similar to health warnings on cigarette packs, trading platforms should present prominent risk warnings before investors can access high-risk products. Additionally, they should offer standardized performance tracking tools that show investors their net returns after fees and taxes.

Regulation of Investment Gamification Practices: The Securities and Exchange Board of India (SEBI) may consider introducing guidelines on gamification elements used in trading apps. Gamified features like rewards, streaks, and leaderboards encourage excessive trading without due consideration of risk and are in direct conflict with the principle of prudent investing. SEBI may also impose a “cooling-off” period to introduce friction and allow investors to review their trading decisions, similar to recent regulations implemented in other markets such as the United States and the EU.

Accreditation and Regulation of Financial Influencers: “Finfluencers” who use social media to provide investment advice should fall under the regulatory purview of SEBI. Their proposed framework seeks to ensure that individuals influencing financial decisions on social media and other digital platforms are either registered or fully accredited.

It aim is to amend existing regulations to prohibit any association between SEBI-regulated entities, such as stockbrokers or asset managers, and unregistered finfluencers.

The proposed changes would prevent regulated entities from engaging in any form of promotion, advertising, or referral-based partnerships with unregistered individuals. Additionally, SEBI-registered finfluencers will be required to display their registration details, contact information, and adhere to a strict code of conduct in all their financial content.

Investor Education and Literacy Initiatives: The surge in retail participation highlights the urgent need for a national strategy to improve financial literacy. While technology has made investing easier, it has also made it more complex and riskier, making it easier to lose money for retail investors. SEBI, in partnership with financial institutions and educational bodies, should prioritize comprehensive educational programs .

That focus on basic investing principles, financial planning, and the risks of over-trading. A 2022 survey by the National Centre for Financial Education found that only 27% of Indians are financially literate—a figure that must improve to ensure investors can make informed decisions. There is an even more need for making investors more aware about the nuances of their investment choices.

India stands at a pivotal moment in its financial history. While the rise of retail investors and gamification of investing represent exciting opportunities, they come with inherent risks that require careful management and a strategic, pragmatic approach. The proposed changes, focusing on transparency, regulation of gamified practices, finfluencer accreditation, and investor education, are not just necessary—they are urgent. The goal is to balance innovation with investor protection, ensuring that the growing participation in capital markets contributes to a stable, sustainable, and equitable financial future for India.

By taking proactive steps to regulate gamification and support investor protection, India can continue to build a vibrant retail investment ecosystem that serves both individuals and the broader economy. In the words of Warren Buffett, “Risk comes from not knowing what you’re doing.” Let’s make sure our retail investors know exactly what they’re doing with their hard-earned money and savings.

(The author is Pankaj Sharma, Senior Manager, Capital Markets Policy, CFA Institute. Views are own)

(Disclaimer: Recommendations, suggestions, views, and opinions given by the experts are their own. These do not represent the views of The Economic Times)

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