YOU'VE BEEN WARNED
Business Today|December 12, 2021
INDIAN RETAIL INVESTORS HAVE NEVER BEEN SO BULLISH ON STOCKS. THEY COME TO THE MARKET IN HORDES, AND TRY EVERY TRICK AND AVENUE—FROM PENNY STOCKS TO ALGOS—TO MAKE A QUICK BUCK. BUT EVEN WITH THE EUPHORIA, IT IS A GOOD TIME TO EXERCISE CAUTION
ASHISH RUKHAIYAR

₹86,000 crore

Net investment in 2021 (till September) by retail investors in NSE cash segment

₹51,200 crore

Net investment in 2020 by retail investors in NSE cash segment

IF YOU DON’T FIND a way to make money while you sleep, you will work until you die.”

What Warren Buffett meant was that one should have a steady income stream in place, irrespective of whether one is working, vacationing or sick. Or perhaps, even when one is literally sleeping! But as is the case with most adages, people have interpreted the legendary investor’s words in a way that suits their actions or convenience.

Record numbers of retail, or individual, investors in India are entering the stock markets and capitalising on the year-and-a-half-long bull run—some even while sleeping. What else would explain the investor behaviour in the market currently, especially in the cash (or spot) market?

According to data from the National Stock Exchange (NSE)— the country’s largest by market share in the cash and derivatives market—net investment by the retail segment was ₹51,200 crore in 2020 in the cash market. That has already risen to ₹86,000 crore this year till September.

This is much higher than the institutional participation in the same period. As per NSE, foreign portfolio investors (FPIs)—traditionally considered the prime drivers of a bull run in the Indian stock market—have been net sellers so far, at ₹30,600 crore, in the cash market. And while domestic institutional investors (DIIs) are net buyers, the amount is a mere ₹9,700 crore, as per the exchange.

This contrast is also reflective of the record number of retail investors that have entered the market since the pandemic. Retail traders accounted for 45 per cent of all investors on the NSE in FY21, a significant jump from 33 per cent in FY16. More than a million new accounts were created in each month this calendar year, with a new high being set each month.

That’s no surprise, considering the Indian stock market is among the best performing globally this year. The benchmark Sensex and Nifty have gained nearly 27 per cent and 30 per cent, respectively, this year through November 10. Generally, this sort of retail interest is the hallmark of a healthy equity investment culture as people opt for well-regulated and transparent public markets over physical, but opaque, asset classes such as real estate and gold.

However, the market’s bull run has a few worrying signals. Stocks across sectors are at record highs, as are valuations, but without a corresponding shift in fundamentals. A cursory glance through India Inc.’s financial reports clearly shows headwinds looming, such as rising crude prices and in-flation, which are bound to impact profit margins.

The Warning Signs

Inflationary pressures leading to tighter monetary policy

Foreign investors increasing quantum of outflows

Expensive valuations pushing up probability of a correction

Weak global cues a constant headwind

Earnings getting hit due to higher input costs

Concerns of an impending correction have increased, almost in lockstep with the stock market’s gains. Many market experts believe investors—especially the average retail ones—should reduce their exposure to the market as stretched valuations, the slowing pace of foreign inflows and margin pressures have increased the probability of a steep correction.

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