Indian stock traders look at share prices during in Mumbai on February 6, 2018. Indranil Mukherjee | AFP | Getty Images

For a 59-year-old senior company executive living in a small town in the foothills of the Himalayas, investing in equities was previously never an option. But since July last year, he has poured 50 percent of his savings, which were sitting in the bank, into mutual funds. "I saw no other avenue to grow my money as I am going to be retiring soon," the man, Chandramouli Kumar, told CNBC. The changing habits of the formerly risk averse middle class in India, far from the financial capital of Mumbai, have caused quite a rally in the country's stock market: Its benchmark Sensex index soared 28 percent year on year in 2017. Domestic institutions, armed with funds from small and medium investors, have also spent almost 80 percent more on Indian stocks in 2017 than foreign portfolio investors, industry data showed. Even the current correction in the market has been stemmed as domestic investors continue to buy while the foreign institutions exit owing to global headwinds, said experts.

'There is no alternative'

One of the reasons for this splurge is the under performance of other traditional asset classes like gold and real estate. Bank deposit and small savings interest rates have also gradually dropped from 9.5 percent to about 6 percent over the last few years, according to the industry. "It's not that they [retail investors] became risk lovers overnight," explained Shantanu Awasthi, head of products and international business at Karvy Private Wealth. Growing income levels in smaller towns, together with financial inclusion policies and a high profile advertising campaign from the Association of Mutual Funds in India (AMFI), are nudging people into the market, experts said.

Bringing in the common man

The AMFI campaign is aimed at the common man and tries to break the idea that mutual funds are exclusively for the wealthy, by advertising the fact that investments can begin from as little as $8 a month. "The whole purpose of the ad campaign was to make investing in mutual funds a part of the chat over chai [tea]," said AMFI Chairman A Balasubramanian, who is also chief executive of the Aditya Birla Sun Life Asset Management Company. "India needs larger contribution from retail investors, every citizen should be a part of wealth creation." The momentum has picked up. Retail assets under management at equity funds have more than doubled in the past two years, with investors from small towns contributing the most, industry data showed. "The majority of our new customers are first-timers in the capital markets, many typically earn a salary of about $12,500 a year and live in cities other than the top 15," said Vidya Bala, head of mutual fund research at FundsIndia.com.

Bubble or buffer?