How Retail Investors Have Slowed Down India’s Stock Market Fall

In April, inflows into systematic investment plans (SIPs) of mutual funds fell around 3.8% month-on-month to 11,863 crore. A SIP is a mode of investment primarily into equity mutual funds. In that sense, an investor investing through the SIP route is largely buying stocks indirectly. In fact, in the seven-month period from October 2021 to April 2022, total investments made through the SIP route stood at Rs79,975 crore.

Interestingly, the SIP investment remains strong even as the foreign institutional investors (FIIs) are continuing to sell out of Indian stocks. From October 2021 to April 2022, the FIIs sold stocks worth Rs1.66 trillion. This selling has continued this month as well, with net sales up to 18 May amounting to 30,394 crore.

Over and above this, investors continue to open demat accounts at a fast pace. From the end of December 2020 to March 2022, the latest data available, the number of demat accounts went up by 80% to 89.7 million. The BSE Sensex reached its highest ever level on 18 October at 61,766 points. In fact, even from November 2021 to March 2022, the number of demat accounts has gone up by 22%.

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

In fact, average monthly inflow into SIPs since the end of December 2020 has been more than 10,000 crore. Between January 2020 and December 2020, it was around 8,100 crore.

What this tells us is that when it comes to investing the law of demand doesn’t really work. Simply put, the law of demand states that the lower the price, the higher the demand. In case of investing what works is the reverse – the higher the price, the higher the demand. This can be gauged from the fact that 3.5 million demat accounts were opened during October 2021, which was more than in any other month until then. This was in the month that the BSE Sensex peaked.

Secondly, the easy money policy unleashed by the Reserve Bank of India to help the government borrow at low interest rates, pushed people to look for higher returns and hence, money found its way into stocks, ultimately fueling a bubble where stock prices were totally out of sync with respect to expected earnings.

Third, the retail demand for stocks helped loss-making companies launch their initial public offerings (IPOs). Some of these IPOs were totally or partly offers for sale, where promoters cashed in on their equity by selling it to the public. Post listing, most of these stocks have turned into massive loss-making propositions.

Fourth, the retail demand for stocks has helped even a recent IPO like Delhivery. The retail portion of the IPO was undersubscribed at 0.57 times. But the overall IPO was oversubscribed 1.63 times primarily because the qualified institutional bidders (QIBs) category was oversubscribed 2.66 times. QIBs are basically financial institutions such as mutual funds, insurance companies, FIIs etc. The money invested by mutual funds and insurance companies is ultimately retail money. Simply put, money coming into SIPs continues to finance IPOs.

And finally, if the retail money hadn’t continued to come into the stock market in various ways, the FII selling would have led to a bloodbath by now. It’s the continuous buying by the retail investors that has helped prevent that. Of course, all this is largely in line with what has happened post 2008, where FIIs buy in years when valuations are low and sell in years when valuations are high. The retail investors do the opposite.

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