GREED OVER FUNDAMENTALS: THE INVESTOR'S FOLLY

In her address at the fifth SEBI-NISM research conference on March 12, 2024, Securities and Exchange Board of India (SEBI) chief Madhabi Puri Buch expressed her concerns about the valuation froth in the mid- and small-cap space.

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The next day the Nifty Mid-cap and Nifty Small-cap indices dropped 4.4% and 5.3%, respectively. But who cares? The correction is a buying opportunity.

The number of demat accounts has surged from approximately four crore in March 2020 to nearly 15 crore as of today. And this is accelerating, with a monthly record addition of about 46.8 lakh demat accounts in January 2024 alone. This is just the tip of the iceberg. With about 65% of the 1.4 crore population below 35 years of age, India is a nation of thriving youth believing in instant gratification.

Canary in a Coal Mine

First-time investors with no prior experience in investing are finding it easy to open trading accounts with discount brokers that offer quick onboarding. The growth of these discount brokers has been unprecedented, with more than 60% of NSE’s active client base already captured by them. This is a welcome development for the country that is hooked to investing in gold and fixed deposits and now moving into financial assets. Rapid financialisation is great for India’s future and the growth of the industry; however, the problem comes when the short-termism, excessive leverage and “gamification” of investing takes centre stage.

Retail investors generally favour small-cap stocks where the risk is maximum. Looking at the past three years of staggering returns, retail investors are increasing their small-cap holdings. The overall ownership of NSE Small-cap 100 Index by the retail investors has jumped to 15.4% currently, versus 12.5% in March 2019, while the ownership of NSE 100 remained largely stable around 8% during the same period.