How retail investors slowed down India’s stock market plunge

In April, inflows into Systematic Investment Plans (SIPs) for mutual funds decreased by about 3.8% month over month to R11,863 crore Rs. SIP is an investment method primarily in mutual funds. In this sense, the investor who invests through the SIP path is largely buying the shares indirectly. In fact, in the seven-month period from October 2021 to April 2022, the total investment made through the SIP route was Rs 79,975 crore.

Interestingly, SIP investment remains strong even as foreign institutional investors (FIIs) continue to sell Indian stocks. From October 2021 to April 2022, FIIs sold shares worth 1.66 trillion rupees. This sale continued this month as well, with net sales up to May 18 R30,394 crore Rs.

Moreover, investors continue to open demat accounts at a rapid pace. From the end of December 2020 to March 2022, the latest available data, the number of demat accounts increased by 80% to 89.7 million. The BSE Sensex index reached its highest level on October 18 at 61,766 points. In fact, even from November 2021 to March 2022, the number of demat accounts increased by 22%.

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

In fact, the average monthly flow to SIPs since the end of December 2020 has been more than R10,000 crores. Between January 2020 and December 2020, it has been R8100 crores.

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 greater the demand. In the case of investing what works is the opposite – 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 the month when BSE Sensex reached its peak.

Secondly, the easy fiscal policy launched by the Reserve Bank of India to help the government to borrow at low interest rates led people to look for higher yields and thus, money found its way into stocks, eventually fueling a bubble where stock prices were completely out. out of sync with respect to expected earnings.

Third, retail demand for stocks helped loser companies launch their initial public offerings (IPOs). Some of these IPOs were offers to sell in whole or in part, with promoters profiting from their shares by selling them to the public. After the listing, most of these stocks turned out to be huge propositions that lead to a loss.

Fourth, it helped retail demand for stocks until the recent IPO like Delhivery. The retail portion of the IPO was oversubscribed at 0.57 times. But it has been oversubscribed by 1.63 times, mainly because the category of Qualified Institutional Bidders (QIBs) has been oversubscribed by 2.66 times. A bank is primarily considered as 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, the money that goes into SIPs goes on to fund the IPOs.

Finally, if retail money had not continued to enter the stock market in various ways, the sale of FII would have led to a bloodbath by now. It was the continued buying by retail investors that helped prevent this. Of course, all of this is largely in line with what happened after 2008, where FII makers buy in years when valuations are low and sell in years when valuations are high. Individual investors do the opposite.

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