How retail investors saved the stock markets

In April, inflows into mutual 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, a person who invests through the SIP route is largely buying shares indirectly. In fact, in the seven months from October to April, the total investments made through the SIP route stood at $79,975 crores.

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

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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. Even from November to March, the number of demat accounts 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.

The average monthly entry into SIPs since the end of December 2020 has been more than$10,000 crores. it was in$8,100 crore between January 2020 and December 2020.

This tells us 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, ultimately fueling a bubble in which stock prices crashed completely. out of sync with expected earnings.

Third, retail demand for shares helped loss-making companies launch and complete their initial public offerings (IPOs). Some IPOs were wholly or partially offers for sale, where 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. However, the overall IPO was 1.63x oversubscribed primarily because the Qualified Institutional Bidders (QIB) category was 2.66x oversubscribed. QIBs are basically financial institutions like mutual funds, insurance companies, and FIIs. 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.

Finally, had retail money not continued to enter the stock market in various ways, the FII sale would have already led to a bloodbath. Continued buying by retail investors has helped prevent that. 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.

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