Why India's Retail Traders Lose Money In Derivatives
The Nifty50 index has risen nearly 13% since its April lows
On Episode 635 of The Core Report, financial journalist Govindraj Ethiraj talks to Rajashree Sarna, Partner, Grant Thornton Bharat as well as Ashish Nanda, President and Digital Business Head at Kotak Securities.
SHOW NOTES
(00:00) Stories of the Day
(00:50) Indian markets in consolidation mode
(03:32) First signs of tariff impact on the US economy
(08:21) Decoding India’s high tax refunds and collections
(16:08) Why India’s retail traders lose money in derivatives
(26:38) And France is considering cutting two holidays to save money
NOTE: This transcript contains the host's monologue and includes interview transcripts by a machine. Human eyes have gone through the script but there might still be errors in some of the text, so please refer to the audio in case you need to clarify any part. If you want to get in touch regarding any feedback, you can drop us a message on [email protected].
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Good morning, it's Thursday the 17th of July and this is Govindraj Ethiraj broadcasting and streaming weekdays from Mumbai, India's financial capital.
Our top stories and themes.
The Indian markets are in consolidation mode.
The first signs of tariff impact on the US economy.
Decoding India's high tax refunds and collections.
Why India's retail traders lose money in consolidation.
And France is considering cutting two holidays to save money.
Markets In Consolidation
What happens exactly in a consolidation phase? Well, that's the question many market people are asking because most institutional investors are referring to the current market as one. This includes investors we've been speaking to in the last month or so.
The Nifty 50 index is up about 13% since its April lows, which is also tracking global markets, recovering from other things that trump tariff shocks, which evidently the markets don't care about today. Analysts at brokerage Sanford Bernstein have said the markets will go through a consolidation phase amidst mixed macroeconomic signals, according to a business standard report. They have a calendar year target of 26,500 for the Nifty 50, which is about 5.1% higher than current levels.
Current levels are something we'll come to in a moment. Bernstein analysts said that it will not be heading directly to that level. We expect a bit of consolidation before the next move and that they were shifting weights from utilities to staples, moving into a tactical overweight for a short period.
They also pointed out that there are growing signs that macroeconomic momentum is moderating as reflected in recent high frequency indicators. Now we know all these indicators, it's useful to go over them once again. So Bernstein says that these instances include industrial activity, which appears to be softening with the index of industrial production hitting a nine month low, mirrored by a similar dip in core sectors, power demand and oil and gas production have moderated in April, while passenger vehicle sales remain subdued and air traffic growth shows signs of cooling.
Credit growth too has moderated. On the other hand, steel and coal production have outperformed recent averages, says that report, while cement is also strong, supported in part by rising pet coke consumption. On the consumer front, several consumer companies across consumer product and retail have delivered positive first quarter commentary, highlighting sequential improvements in volume growth.
Power demand has rebounded in recent weeks and petrol consumption has picked up, says that report, though some demand fluctuations may also be attributable to the early arrival of the monsoon, which indeed has changed things. Overall, says Bernstein, the data presents a mixed picture, pockets of resilience are evident, but the broader trend suggests a more moderate phase of economic expansion rather than a sustained acceleration. So that's the point here, the big growth jump that we were looking forward to or are expecting, which is about 8% GDP plus, is not likely to happen now.
And this is, of course, something that many economists have also pointed out and concurred with. This also means that you have to look and focus on specific stocks because that's where you will find winners, as again, many analysts and fund houses have pointed out. So against this backdrop, the indices on Wednesday closed with marginal gains, the Sensex was up 63 points to 82,634 and the Nifty 50 was up only 16 points to 25,212.
Meanwhile, the Wall Street Journal said on Tuesday, now this is for the United States, inflation numbers for June came in close to economists' expectations of 2.7% annually, but there were price bumps on what Americans pay for key imports such as furniture and clothing, a potential sign of tariff-linked price increases that many economists think will continue in the months ahead. Americans as of Sunday faced a 20% average effective tariff rate, according to the Yale Budget Lab, it's 20.6, actually, the highest since 1910, according to the Wall Street Journal, which added that the full effect of tariffs might not be felt for months because of importers' prior stockpiling, long shipping times and Trump's mercurial deal-making. But the Yale Budget Lab does project that resulting price increases could amount to the equivalent of $2,800 in yearly household income being hit.
Already, says the Wall Street Journal, the cost of important economic inputs such as steel, aluminium have gone higher. Copper prices have already hit a record after Trump announced 50% tariffs on imported supplies starting first, which will make construction of data centres, homes, and semiconductors more expensive. So while we're waiting for what the India-America trade deal will be like, remember that India could have a reverse situation wherein we might get or start getting some products, maybe it would be just alcohol and almonds and maybe a few dairy products at much lower prices. So whether that will have an impact on the larger household bill, we don't know, but this is something to watch out for.
And of course, not to forget, Harley Davidson bikes. The AI boom continues to throw up new surprises from old horses. We're still on Wall Street, by the way.
Remember, NVIDIA was a gaming chip company that no one spoke about or very few spoke about except in the gaming communities. Now it's Oracle, the 48-year-old database company, the most unlikely AI success story, according to the Wall Street Journal. Again, Oracle already built up a cloud business to compete with industry titans like Amazon, Microsoft, and Google.
But thanks to the demand in AI computing or 4MI computing, Oracle's contracted revenue for the last fiscal year that ended May is at $138 billion, up $40 billion from the same point the prior year and more than double the same point two years ago. Oracle's stock price has doubled in two years and its market capitalisation is around $650 billion. Back home, there's a lot of supply coming into the markets via mutual funds.
This time, Jio BlackRock Mutual Fund, the Reliance Group's return to retail financial services as part of the Mukesh Ambani-led Reliance Industries, has got Securities and Exchange Board of India approval to launch four new passive investment schemes that include the Jio BlackRock Nifty Mid-Cap 150 Index Fund, the Jio BlackRock Nifty Next 50 Index Fund, which will track the Next 50 Index, the Jio BlackRock Nifty Small Cap 250, which will target Small Cap, and the Jio BlackRock Nifty 8 to 13 Year G-Sec Index Fund, that's the fixed income fund. So all of this is coming your way quite soon. But mutual funds usually grow steadily.
And while pedigree is important, it does take time and steady performance, of course, helps. And for a new fund, marketing will also help, I'm sure. The largest funds in India, in terms of assets under management, by the way, are State Bank of India, ICICI, HDFC, and Kotak Mutual Fund Arms.
The Bull Case For Gold
Gold prices could go up to 15% in a bull case scenario from the current levels, reaching 3,839 announced levels by December 25 end, which would mean an annual return of 40%. According to a note just out from the World Gold Council, a key driver of this is safe haven demand, particularly if economic and financial conditions don't look very good or become unpredictable, which is what they are to some extent already, despite the stock markets hitting new highs.
The World Gold Council feels either way, gold prices could remain range bound in the second half of the calendar year, but would still be above current levels or a 25 to 30% annual return. So who are the big buyers? Well, central banks for sure, as we've been pointing out right here. In addition, as the WGC report says, there has been demand from increased trading activity across over-the-counter markets, exchanges, and exchange-traded funds.
This was evident in volumes, which rose to about $329 billion per day in the first half of 2025, that's this year, which is the highest semi-annual figure on the World Gold Council's record. Total holdings rose about 397 tonnes, equivalent to about $38 billion to 3,616 tonnes, the highest month-end level since August 2022, according to the WGC.
Where Are Tax Collections Going?
The government's net direct tax collection fell slightly by about 1.3% year-on-year to Rs 5.6 trillion, or Rs 560,000 crore, between April 1 and July 10.
Direct taxes, which include corporate and personal tax, grew 3.2% to Rs 660,000 crore, or Rs 6.6 trillion on a gross basis, according to a statement from the Income Tax Department. Significantly, the government has said it issued tax refunds worth about Rs 1.01 trillion, or Rs 101,000 crore, during the period, which was 38% higher. The government has set targets of about Rs 10.8 trillion for corporate tax and Rs 14.2 trillion from non-corporate entities, and that's individuals.
Remember, all of this is direct tax and not indirect tax, which includes goods and services tax. So how could this happen, and what are the reasons for those high refunds that we're seeing? I reached out to Rajashree Sarna, partner at Grant Thornton Bharat, and I began by asking her how she was decoding these latest tax numbers.
INTERVIEW TRANSCRIPT
Rajashree Sarna: A couple of reasons which I can attribute to that. One, the refunds are a function of higher amounts of advanced taxes and self-assessment taxes also paid by the individuals or by the taxpayers over the last few years if you see. So, you know, while news articles are analysing the gross collection versus refund over the last 10 years, one data point which we can look at is also the quantum of taxes paid directly through advanced tax and self-assessment tax versus what is paid pursuant to tax cookies or tax assessments.
If we see in the last 10 years, from 45% self-assessment or advanced taxes being paid, that amount has drastically increased to almost 60% now. What that means is, people are more aware, people are paying advanced taxes and self-assessment tax more in time and during the financial year or at the time of filing the return itself. As a result, it is possible that there is an overestimation of income and therefore there's a higher amount of taxes being paid, which translates to refund, when the processing happens.
And also refund processing itself or the tax return processing timeline itself has increased or has become much better in the sense it has become quicker and faster, which results in the refund getting determined and disbursed also faster. So, you know, bottlenecks have been, reforms have come in from both sides, leading to larger refunds or quicker refunds. This would have a bearing on the net direct tax collections that we see.
Govindraj Ethiraj: But if you were to take the refunds number out of the picture, we are definitely seeing some slowdown in tax collections, right? What would you attribute that to?
Rajashree Sarna: See, slowdown in tax collections, we need to look at further data to see which pockets are the slowdown happening. Is it happening from the salary taxpayers, individuals as a whole, within individuals from the salary or from corporates or other sources. When we have that bit of data, it will be easier to correlate it and say whether it is a function of larger macroeconomic conditions or is it more of personal tax related matters or reductions or exemptions?
Where is the money coming in from? Unless we have that data, it is difficult to put a pin on why exactly the direct tax collections are slightly lower or the trend appears to be slightly lower, especially only for these three months, if you look at it.
Govindraj Ethiraj: And if you were to look ahead now, Rajshree, how are you seeing trends in terms of companies who are paying their advance taxes or the results themselves? When you look at balance sheets, what is all of that telling you?
Rajashree Sarna: See, there have been a lot of changes or reforms in the direct tax front from companies from the phasing out of the deductions and exemptions, whether at a corporate level or at the individual level. The lowering of the corporate tax rate and the individual tax rate under the new tax regime. There have been in the last 10 years, if we see there is the SFT reporting from 2014 onwards, due to which financial institutions, banks, post offices even.
So, they are reporting the data, which flows into the 26 AS, AIS and PIS, which taxpayers can see. So, if we put everything together, the reporting framework and the economy and the corporate results and the trends that we are seeing, looks like the tax collections or the tax revenue forecast will be pretty much, it will get achieved, we will be on track.
Govindraj Ethiraj: Right. On the other hand, our targets are also quite ambitious, which are of course being met by many categories of income tax, including let's say securities transaction tax, which has been rising. So, are you seeing any shifts there?
I mean, as you look ahead in terms of where the tax could come or newer areas or areas that were big earlier not being so big?
Rajashree Sarna: I think the securities transaction tax, yes, because the trends which we see in the last four, five years, especially post COVID is a lot more participation in the equities, in the direct equities by individuals across. So, a lot of money flows out of banks or banking systems into the stock exchange. So, from there, we will see the increase in securities transaction tax also coming in.
Capital gains tax, so that will automatically also result in higher capital gains tax potentially, though the capital gains tax has been rationalised, but it will still result in more taxes for the government network when you look at the overall impact to it. So, in these two areas, the government will receive higher tax revenue. Also, in the corporate sector, compensation has gone up.
So, the individual income tax also, and also what we see from say stock options or long term incentives, which would be reaching a maturity now and the kick in, whether it is the startup ecosystem or other large corporates where stock options would be resting or the graded resting through that, it would be coming up now. So, these are all areas where we do expect to see an uptick in the direct tax collections apart from corporations.
Govindraj Ethiraj: Right. And last question. So, when you look at the overall tax environment in terms of collections and what's coming in, are you seeing or do you feel that we are at a stable rate of growth now, because we've seen high rates of growth in the recent past, or are we adjusting to some new levels?
I mean, I'm just trying to understand what it is that you're seeing as you look ahead?
Rajashree Sarna: Not stable. So, obviously the economy or how the tax revenues phase up is a reflection of what's happening at a domestic level as well as what's happening internationally. So, the government is coming up with their policy initiatives, their reforms in terms of the tax administration, simplifying the taxes also.
Still, the ratio of taxpayers to the total economy, the ratio of taxpayers who actually pay taxes to the total. So, all of that in India is still very much on the lower side. So, the government has been focussing on increasing the taxpayer base, which is there.
However, the number of people actually paying taxes or the quantum of taxes, that definitely has to see an upswing. So, I would say still a long way to go for the taxpayers in India. And in increasing the tax to GDP ratio itself per se, compared to vis-a-vis other developed countries or other countries in the neighbourhood.
So, still not stable in one way, but still a long way to go to reach an optimal level in terms of tax contribution.
Govindraj Ethiraj: Right. Rajashree, thank you so much for joining me.
Rajashree Sarna: Thank you.
The Derivative Frenzy
Retail derivative traders have lost more than Rs 250,000 crores, or over $30 billion in the last four years, to mostly large and sophisticated firms sitting on Wall Street. In the last year, they lost about Rs 100,000 crore, or Rs 1 trillion. There are some interesting insights on this, or all of this, coming up in a moment.
Another data point, more than 90% of derivative traders, and we're not using the word investors here, lose money. And most of them are stretching their finances and savings, if not eating into them, or if not burning it up totally. So the larger question in some ways is, how do we address this? Can we create awareness on how to approach the stock markets with greater care? And who are these people? I spoke with Ashish Nanda, president and digital business head at Kotak Securities, the stockbroking firm, and I began by asking him how he was seeing a way out.
But first, how did he process the numbers that we just spoke about? Holidays in France France is flirting with the idea of cutting two public holidays as the government targets more spending cuts to plug a budget black hole, according to a report in CNBC. French Prime Minister François Bayrou announced plans for spending cuts on Tuesday, as the government targets about $51 billion worth of savings in a bid to reach a budget deficit level of 4.6% in 2026. Amongst the proposals were suggestions that public holidays be scrapped, 3,000 civil service jobs eliminated, and the limitation of tax breaks for the wealthy.
So there you are. It's not just the United States, but there are many countries in the world who are now talking about eliminating civil service jobs. The French government suggested that the public holidays that could face the acts are Easter Monday, which it said has no longer any religious significance, and May 8, also known as Victory in Europe Day.
INTERVIEW TRANSCRIPT
Ashish Nanda: Derivatives have been there in the Indian markets for a lot of 20 years. But I think the entire volumes in the derivative market or the frenzy has come in the last 4-5 years, 2020 probably, 1920 onwards. I think much of it has been fueled by social media, where I think a lot of so-called gurus have made the retail investors believe that it is quite easy to make money in the F&O market.
Far away from reality, but I think that is what has broadly fuelled this rally. And if you see a lot of videos on YouTube, if you go into Twitter or any other channel, you will see so many videos which kind of make you believe that every trade a person does, it actually ends up in a profit. If at all there is a loss, next day there is a profit.
So I think it is more fuelled by this frenzy, which is run from social media. I think it is easier to make money in the F&O market.
Govindraj Ethiraj: Got it. So if I were to go into a bit of definition, most of the losses are in options and options are essentially, you know, I mean, you pay a premium and you know, you are betting on a certain movement of the underlying price. So therefore it is linked to what happens or doesn't happen with the underlying price.
So where do people then make that mistake? Because they can see share prices not necessarily only going in one direction.
Ashish Nanda: Govind, I'll answer it in a slightly different way. When I go to a lot of events where I'm a I ask customers whether you are a trader or an investor. I've seen a lot of those events, there are a lot of people who, there are 50-50 people raising their hands that I'm an investor and a trader.
And a lot of investors also want to become traders. So I think there is definitely that thing in the market that I want to become a trader, I want to trade in F&O, so that kind of thing is there. Again, I think the reason may be that people feel that if I get the formula right, I will be able to make a lot of money in this market.
What actually happens is that F&Os are very complex tools. It is not a very easy tool. When I started and whatever I've seen in the last 20 years, the ideal way is to first you start with your medical insurance, then term insurance, then probably get into mutual funds through SIP, lumps up into mutual funds, maybe large cap, then mid cap, then small cap, then probably a little bit into stocks, largely large cap, then move on to a small value into mid cap, small caps, and then finally comes the number for F&O. What has really happened is that I think a lot of youngsters who are coming into the market, they're starting the journey in the reverse order. F&O is where they are starting.
And that is what the mistake is. And again, the belief that I will be able to do it, F&O is a very complex tool, it requires the knowledge of Greeks, knowledge of where the volatility, wakes, intrinsic value, time value. I think it is a very complex tool, probability.
So I'm not having the entire knowledge and kind of believing that they will be able to do it where they are getting it.
Govindraj Ethiraj: That's an interesting point, because you're saying that the journey into financialization itself is starting with F&O in young individuals.
Ashish Nanda: That is true. That is true.
Govindraj Ethiraj: I think that is where the whole problem is, again, fuelled by social media, I would say. If I were to ask you now about what or how we could approach this, because I guess everyone wants investors to come into the markets and grow over time, including, of course, their wealth. So what would you recommend is an ideal approach in a broad based way?
I think you've already partially highlighted that approach saying that don't get into F&O and derivatives unless you first invested in stocks and mutual funds, large caps, small caps, you know, in this sort of order of risk. So nothing wrong in becoming a trader.
Ashish Nanda: It's absolutely fine. Trader has its own value in the stock markets, you can become a trader. Becoming a trader is not easy.
Becoming a trader takes time. So I think three rules which I generally tell all my listeners or all my clients is that number one, start small. You can't put the kind of money, all your money, all your capital, it's a hardened money where you are getting it from.
I think you can't put the entire capital into F&O when you are in the phase of learning. So it is okay to kind of trade in one lot or two lots in a very small number of and put in a very small amount of capital. As over a period of time you kind of understand the nuances of the stock market, you can increase your exposure but start really, really small.
The second is to get the risk management right. At the end of the day, the position sizing, the amount of money that you put into the capital, you should not put the kind of money into the market that you lose sleep over it at night. So I'm saying A, keep the size small, manage your risk well and you should also know there are a lot of tools which are available to investors.
For example, one largely known tool is something called a stop loss. The difference between an investor and a trader is that the investor is fighting with time. He has to come into the market over a period of time, he has to make money, he's he's got that batting style of a Rahul Dravid who plays test match cricket over a period of one day, he will defend more balls, make runs on less number of balls but at the end of the day, make a hundred and make India win.
I will generally relate to the trading style of Suryakumar Yadav, the Sky we call him. I think he's not bothered about time. Every ball is a chance and he has to hit that ball for a six or a four.
So that is what a trader is. He has to come every day, every day he has to be at the terminal and try to make money. But if he loses his entire capital in one day, I think he will not have anything to come the next day and make money.
So I think risk management is very important. There has to be strict stop losses and there are a lot of tools available with the broker that he has to actually know. There's something called bracket order.
We have something called a strategy board. A lot of tools that he should be aware of which make him a slightly efficient trader. So I think it's all about learning.
You will not be able to make the money the first day and you should not be overconfident.
Govindraj Ethiraj: Right, but breaking organisations like yours, in some ways you would have also made it simpler and easier for these Suryakumar Yadavs to come and bat on your pitch, so to speak. So what would you do to maybe bring about, let's say, more caution amongst those who are coming to trade?
Ashish Nanda: Go in, perhaps you would be the only broker when a client comes and trades at our end and he calls a dealer that he has placed a trade. For the first time, you would be giving a call back to that client who's traded to a dealer telling him, okay, so you are getting into an F&O. It is not an easy science.
Do you understand F&O? Do you understand the options? And that is a good call and we would be kind of alerting the customer that while you are trading with the dealer, we want to be very clear with you that this is a slightly riskier tool.
So I think those are the kind of things that we do with a lot of customers to tell them that what you are getting into is a riskier tool. But unfortunately, what is happening is, there is a frenzy. But I would also like to tell you, I think the frenzy was a little more sometime back and kind of has slightly waned off.
If you actually see the numbers, the number of customers who had traded has come down by about 20-25%. Not too much, but yeah, there is that small decrease because of whatever regulators have taken, whatever regulatory actions they have taken, six measures that they have taken last November and till March, which has kind of eased off the volume a little bit. Having said that, will I say that everything is over?
I think the recent report again says that people have lost 1 lakh crore. While the number has reduced, the average loss per customer has slightly gone up. The good news is the number has reduced, the volumes have kind of slightly come off.
But yeah, the problem still remains.
Govindraj Ethiraj: Last question. So one of the things that's clearly emerged in the last month or two is basically the fact that there are very smart institutional investors or traders working with high power computing and brains, literally sitting on Wall Street against you or on the other side. Now, this is something obviously no one really saw and maybe even today may not be able to really visualise or understand.
How do you tell people that? How does one convince people that listen, you may think you're smart, which is fine, but there is someone who's smarter on the other side who's going to take you to the cleaners? Analogy, I will take you to a jungle.
Ashish Nanda: In the jungle, there are various kinds of animals. There are bulls and bears for sure, but there are a lot of other animals as well. There is that snake in the market who is there to fool you.
I'm not just talking about the machines. Machines are definitely faster, but there are kind of characters in the market who are there to trick you into losing money. So at the end of the day, what can a retail investor do?
A retail investor has to get his risk management well. There is no match to the machines, but if he gets his discipline right, I think that is the way it has to be done. And I think it is okay also to let go of it.
I met a customer that was sometime back and I think he was trading. I just said, what are you doing? And I think it's just a normal conversation and he says, I'm trading.
So I asked him, and he said, I've kind of lost about two lakhs. But then why are you doing it? He said, I want to recover it.
See what people have to kind of see is in businesses also. There are so many businesses where people run four or five businesses and the one which is not working, they will just cut it off. Tata Nano was hugely famed to be one of the best cars, but Tata cut it off and said, this is not the car which will run.
So I mean, that is how it has to be. If trading is not working well for you, if F&O is not working for you, just to just say goodbye to F&O and probably the investor is who you should be. So I think that is what I will tell the customer that I'm saying, if it is not working for you, you can try.
Definitely learning, there is no problem. But I think consistently you are losing money. You have to just cut it off and say, this is not for you.
Govindraj Ethiraj: Right. Ashish, that's a good note to end on. Thank you so much for joining me.
Ashish Nanda: Thank you. Thank you very much. Real pleasure talking to you.
