How Retail Investors Have Halted India’s Stock Market Crash

In April, inflows into investment funds’ systematic investment plans (SIPs) fell by around 3.8% month-on-month to $11,863 crores. An SIP is a mode of investment primarily in equity mutual funds. In that sense, an investor who invests through the SIP route is largely buying shares indirectly. In fact, in the seven-month period between October 2021 and April 2022, the total investments made through the SIP route amounted to Rs79 975 crore.

Interestingly, SIP investment remains strong even as foreign institutional investors (FIIs) continue to sell Indian stocks. From October 2021 to April 2022, IIFs sold shares worth Rs 1.66 trillion. This sale has also continued this month, with net sales through May 18 amounting to $30,394 crores.

Beyond this, investors continue to open bank accounts at a rapid pace. From the end of December 2020 to March 2022, according to the latest available data, the number of demat accounts increased by 80% to 89.7 million. The BSE Sensex reached its highest level on October 18 at 61,766 points. In fact, even from November 2021 to March 2022, the number of demat accounts has increased by 22%.

High retail interest in the stock market tells us several things. First, the average retail investor entered the stock markets only after they had rallied considerably. The BSE Sensex closed at a low of 25,981 points on March 23, 2020. As of December 31, 2020, it had risen 84% to close at 47,751 points. This rally gave the average retail investor the confidence to invest in stocks by opening demat accounts.

In fact, the average monthly entry to SIPs since the end of December 2020 has been more than $10,000 crores. Between January 2020 and December 2020, he was around $8.1 billion rupees.

What this tells us is that when it comes to investing, the law of demand really doesn’t work. In a nutshell, the law of demand states that the lower the price, the higher the demand. In case of investing, what works is the other way around: the higher the price, the greater the demand. This can be measured by the fact that 3.5 million demat accounts were opened during October 2021, more than in any other month until then. This was in the month that the BSE Sensex peaked.

Second, the easy money policy unleashed by the Reserve Bank of India to help the government borrow at low interest rates, pushed people to seek higher yields, and thus money found its way. way into stocks, which ultimately fueled a bubble in which stock prices crashed completely. out of sync with expected earnings.

Third, retail demand for shares helped loss-making companies launch their initial public offerings (IPOs). Some of these IPOs were wholly or partially sales offers, where the promoters cashed in their capital by selling it to the public. After listing, most of these stocks have become massive losing propositions.

Fourth, retail demand for shares has helped even a recent IPO like Delhivery’s. The retail portion of the initial public offering was undersubscribed at 0.57 times. But the overall initial public offering was 1.63 times oversubscribed mainly because the Qualified Institutional Bidders (QIB) category was 2.66 times oversubscribed. QIBs are basically financial institutions like mutual funds, insurance companies, FIIs, etc. The money invested by mutual funds and insurance companies is ultimately retail money. Simply put, the money that goes into SIPs continues to fund IPOs.

And lastly, had retail money not continued to enter the stock market in various ways, the FII sale would have already caused a bloodbath. It is continued buying by retail investors that has helped prevent that. Of course, all of this is largely in line with what happened after 2008, where IIFs buy in years when valuations are low and sell in years when valuations are high. Retail investors do the opposite.

subscribe to mint newsletters

* Please enter a valid email

* Thank you for subscribing to our newsletter.

Add Comment