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On December 20, key benchmark indices – Nifty and the Sensex – took a considerable drubbing. Powering the sell-off were fears of an aggressive spread of the Omicron variant coupled with the US Federal Reserve’s signals last week that it will accelerate the tapering of its asset purchase programme and possibly hike interest rates thrice in 2022.
The two factors working in tandem paved the way for many FII/FPIs exiting the Indian market in droves.
By the end of the day, BSE’s index Sensex had been pummelled by 1,189 points and NSE’s index Nifty had been pulled down by 371 points. In this bloodbath, it was the retail investor who found his neck on the line as millions across India have invested their hard-earned savings in hopes of a quick return and sans a comprehensive understanding of the volatile nature of the markets. Since October 18, investor wealth had been witnessing steady erosion and by Monday end, the total amount of deletion of investors’ wealth stood at Rs 22.11 lakh crore. On Monday alone, investment valuations plummeted by Rs 6.8 lakh crore.
To be fair, this wasn’t the first time that young retail investors were in for a market shock. The much-hyped Rs 18,300 crore IPO of the digital payment company Paytm last month turned out to be a disaster for retail investors who subscribed to the issue. On its debut, the scrip tanked by a whopping 27% wiping out close to Rs 38,000 crore of the company’s valuation. From the very beginning, saner voices were flagging the risks to Paytm’s overinflated valuations, albeit their cautions found no big audience. Consider, for instance, that Paytm’s valuation was at 26 times the price-to-sales ratio of FY23 when most fintechs around the world trade at 0.3-0.5 times that ratio. When Paytm made its first foray onto the virtual trading floor, the stock price crashed leaving nothing but disillusionment and a wave of memes in store for newbie Robinhood investors.
While the market recovered marginally from the Monday meltdown the next day, market experts point out that the market recovery is vulnerable and that there is greater volatility that lies ahead.
“Over the course of the last one year, retail has been getting sucked in via direct equities because the returns have been spectacular in the market. Consequently, a lot of people, without doing any research, are investing money in whichever stock they see moving upwards. In the last year, there hasn’t been a 10% correction in the market. As a result of this, the valuations are pretty aggressive and it is becoming very difficult to deploy money. Now, the markets are showing signs that a correction is in order, and that is what happened on Monday,” Aditya Shah, chief investment officer at JST Investments told The Wire.
Shah added that since 2003, the Nifty has never had an 18-month phase where it hasn’t gone through at least a 10% correction.
“In the last 18 months, the market hasn’t seen even a 10% correction. Because of this investors have become very complacent, thinking to themselves that they won’t lose money in the market and that they can invest in junk companies as well. In such a situation, the market will get very tired of its up move and is now ready for a correction.”
The rise of the retail investor
The last year witnessed an unpredictable explosion of retail investor participation in the Indian capital markets. With the Bharatiya Janata Party (BJP) government imposing the first lockdown, scores of professionals, both employed and recently unemployed, could spare time to not just understand but also dabble in the capital markets.
Retail investors, most of them in the 18-35 age demographic and a majority of the first-time investors, started transacting in the markets as online stock trading apps like Zerodha and Upstox piloted the retail investor surge in India.
The last two years have also seen significant growth in new investor registrations, which has ratcheted up investments by Robinhood investors in the equity markets. In FY21, a total of 1.43 crore new investors were added up by NDSL and CDSL. If that wasn’t enough, over eight lakh new investors were added to the previous tally by the first half of FY22, taking the new entrants to 1.51 crore. The retail investors’ heft has been engineering the recent ascent of the markets. They turned net buyers after a brief three-year hiatus of 2017-19. Individual investors pumped in a total of Rs 1,37,000 crore during 2020 and in the first nine months of 2021 in the equity markets, out of which Rs 86,000 crore was invested in 2021 itself.
Retail investor as a market force
The numbers speak for themselves. It is the retail investor now who rules the equity segment in the Indian markets. As per figures released by NSE in its monthly review of the markets titled Market Pulse, it was the retail investor class that was responsible for a little over 43% of the total turnover in the cash segment in FY22. This figure trails marginally behind the multi-year contribution high clocked in FY21 which was at 45%. Contrasted with the contribution of the retail investors, the FII category pales. In the cash segment, FIIs commanded a total of 11.5% and 11% for FY21 and FY22, respectively.
It isn’t the equity segment alone where retail investors have been dominant. The share of retail investors in the Index Options and Stock Options (premium turnover) has also been consistently high. In both cases, individual investors commanded a hefty 34% of the premium turnover. Meanwhile, in terms of share in the total premium turnover in Index Options and Stock options, FIIs contributed 11% and 7%, respectively, in FY22. Evidently, retail investors are playing a much bigger role than anticipated.
Despite this, it is retail investors who often find themselves in the unenviable position of bearing the brunt of a sell-off as on Monday earlier. That is primarily because retail investors often let the twin polarities of fear and greed govern their investment decisions. During times of a sell-off, as the market witnessed in the past week, investors tend to sell their holdings in panic while in periods of speculative booms, they buy at high valuations and display unwarranted optimism. That not many direct retail shareholders have profited from the markets, in the long run, is evident from CMIE Prowess and NSE ownership data of floating stock.
A free-float market cap comprises shares open to the public for trading. These shares are not held by governments, trusts or promoters. Floating stock ownership for retail investors has plummeted from close to 30% in March 2001 to 18% in March 2021. Meanwhile, for the FIIs, the same number has gone from 15% in March 2001 to 42.9% in March 2021. Given the stratospheric returns that the markets have delivered for investors who have stayed invested through thick and thin over the course of the last two decades, it is evident that FIIs have the retail investors beat in this key parameter. Effectively, only a small minority of direct retail investors end up earning the kind of lucrative returns that the markets promise.
“Retail investors will have to learn to not panic. These corrections are part and parcel of the investing journey. India is a long-term growth story and we are always bullish on India. Within the long-term growth story, the markets will never go up in a straight line. They go up, they go down. That is how it really works. Things will turn out okay for retail investors who are patient and not in a hurry to earn returns,” Shah added.