Retail investors reducing participation in stock markets

What has changed in the last one year

The month of May 2023 marked the third successive month of outflows by retail. That means, retail investors as a whole, sold more shares than they bought. Incidentally, this trend has been continuing for the last 3 months. Retail investors have been sellers in the market, perhaps spurred by higher levels in the index and the sharp 11% bounce in the markets since the lows of March 2023. In fact, the NSE Pulse has pointed out that the combined selling of retail investors in the last 3 months was Rs 19,600 crore. The impact has been more in the cash market and very insignificant in the F&O market, underlining that the shift has happened from the pure retail investors and not from the seasoned traders in the stock market.

The FOMO syndrome post pandemic

The big retail rush can be identified to the post COVID scenario. After a lull of nearly 3 months, the retail investors suddenly found the valuations and pricing very compelling. The simplified account opening norms and the proliferation of discount brokers meant that the cost of participation in the stock markets was vastly reduced. This led to geometric expansion in the number of trading accounts, the number of demat accounts and even the number of mutual fund SIPs. However, most of the millennials who entered the market during this phase realized that low cost is just one part of the story. For investors to make money, they also need solid advice and diligent advisory services. In the absence of that, most investors found themselves disoriented and exited.

Do the numbers show slowdown in retail flows?

Actually, the numbers are quite emphatic about the slowdown in retail flows in the last couple of years. Net retail investments into Indian equities stood at Rs70,000 crore in FY21, Rs1,60,000 crore in FY22 and falling to Rs50,000 in FY23. However, in FY24, the first 2 months have seen net outflows of Rs15,000 crore. Clearly, retail flows peaked in FY22 and since then it has been consistently on its way down. Clearly, there was a lot of opportunistic retail money that came into the markets post FY21 and that is gradually winding down as the markets are staying range bound for a prolonged period. Also, much of the liquidity driven rally is gradually unwinding as higher inflation has been taking a toll on the investable surplus of retail investors.

Remember, debt is a lot more attractive now

The post pandemic period represented a tremendous sweet spot for the retail investors to participate in equities. Interest rates were at low levels, debt was unattractive and equity prices had crashed during the pandemic. The recipe was perfect for a sharp bounce in equities, which is what we got to see. However, since May 2022 the RBI started hiking rates aggressively. Between May 2022 and February 2023, the RBI hiked rates by 250 basis points making the FD interest a lot more attractive. This led to a lot of opportunistic equity money to jump back into debt. That was a major factor for such limited participation in equities by retail investors in the recent past. Why risk money in equities when debt returns are so attractive?

Look at it as a larger allocation story

It is natural to start drawing interpretations from these numbers. This is a natural process of asset allocation retail investors do when the fundamentals change. While retail participation may have reduced sharply in the equity markets, retail investors continue to be serious investors in mutual funds as reflected in the consistent growth in SIP folios, SIP AUM and monthly SIP collections. One thing that emerges is that investors should not jump into equities with a very short term perspective. As they say, in the short term, the stock market may be a slotting machine but in the long run it is always a weighing machine.

Content Source: Financial Express