Can angel investing become bigger than stock investments....ever?

By Ninie Verma, Content Associate, 1stCheque by Favcy 

  • Only an approximate 3% of India's population invests in stocks and private equity. With the growth of financial awareness, a lot of salaried individuals are opting for diverse asset classes.
  • 2021 saw a phenomenal increase in angel investments. But can it ever become bigger than stocks?



Where does new India invest?

Let me tell you an astonishing fact.

An approximate total of only 2-3% of the Indian population invests in the stock market. Out of this, only 1% of the population invests in the stock market directly. The remaining % is invested in stocks Indirectly - through Mutual funds, LIC and other similar investments available in India.

Angel investors are another niche subset of this 3%.

However, 2021 saw a tectonic shift in the way younger India invests. The number of individual investors in the market increased by a whopping 142 lakh in FY21, says an SBI report. Angel funding also saw a massive 22% increase in FY21.

What makes people choose one asset class over another?

The Battle of the Asset Classes

Stock markets v/s Angel Investing - who’s going to win?

Here are the pros and cons of investing in the stock market -

Pros of stock market investing

1. The likelihood of stronger short-term returns. When compared to alternative investment routes like as PPF and fixed deposits, investing in the stock market has the potential to deliver higher inflation-beating returns in a shorter period of time

2. Unrivaled liquidity. Unlike other types of investments, investing in stocks has practically unmatched liquidity. Investors can purchase or sell within seconds, depending on their preferences. If you want immediate liquidity, you may always sell your shares and obtain the funds.


Cons of stock marketing investing

1. High Volatility. Because markets are turbulent and ever-changing, investment in stocks has its own risks. Share prices rise and fall numerous times in a single day. These swings are typically unforeseen, and they can put assets at risk. Furthermore, while significant failures are uncommon, it can take years for the market to recover from the effects of a catastrophe. 

2. Brokerage might reduce profit margins. When an investor decides to purchase or sell shares, he or she must pay a percentage of the transaction as brokerage fees to the broker. Profitability may suffer as a result.


Pros of Angel Investing

1. High risk, high returns. There is an enormous upside if the startup becomes successful. In the case of a startup exit, the return on investment may be enormous for both investors and entrepreneurs.

2. Being heard. Compared to publicly listed companies, investors can get more of a say in direction of the startups' journey depending on the ownership percentage.

Cons of Angel Investing

1.  High returns, high risk. There is a massive amount of risk, especially with early-stage startups. There is a high chance that an early-stage startup might fail and a good chance that a later-stage startup might fail. 

2. Illiquid asset  class. The lack of liquidity for your investment is a major con. You will mostly be unable to sell your shares until the startup gets an exit.

What's the verdict?

Both asset classes have their own nuances. While angel investing offers very high returns, the risk is equally high and so is the investment time period (liquidity). On the other hand, while stocks offer returns over a short period of time, they can also be volatile.

The key to making sure your investment portfolio is fail-safe is diversification across asset classes.

Having said that, can angel investing ever become as big as stock investing in India? Or even bigger?

And the answer is yes. It is definitely possible.

The average annual return from investing in publicly traded companies is roughly 5%. The average annual return from an active, professionally managed, disciplined, long term, angel investment portfolio is roughly 25%.