India is undergoing an astonishing stock market revolution

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Subscribe to enjoy similar stories. It is the largest-ever experiment in participatory capitalism. As India’s stock market has surged, households have scrambled to stake a claim in its success.

With barriers to entry falling, roughly 100m people not far above the poverty line have become capitalists, owning tiny stakes in publicly traded companies. One in five households today holds shares, up from one in 14 just five years ago. The number is set to rise further.

According to India’s financial regulator, a new mutual fund with a minimum monthly contribution of 250 rupees ($3) will soon be launched. Those who got involved early have benefited from a jaw-dropping rally. In dollar terms, Indian stocks have risen in price by 80% over the past five years, compared with a 6% rise across emerging markets as a whole (see chart 1).

Yet this joyous growth comes with growing risks. Many investors are making their first venture into financial markets, with limited knowledge of the pitfalls. The exuberant atmosphere has left India’s stocks looking extremely expensive relative to their profits.

And financial liberalisation has lit a fire under derivatives markets—posing a threat to financial stability, as well as to fresh-faced investors. The 250-rupee fund illustrates India’s financial transformation. Its sponsor is Aditya Birla Sun Life, a joint venture between an Indian conglomerate (the first two words in the name) and a Canadian insurance firm (the last two).