Vendor hands Indian rupee banknotes to customer at a stall in Chauta Bazaar in Surat, Gujarat (representative image) | Photo: Karen Dias | Bloomberg

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New Delhi: The Covid-19 pandemic may have derailed the Indian economy, but it certainly blew up the country’s stock markets.

Since the lockdown was introduced in March 2020, there has been a massive increase in retail investors – the ‘aam aadmi‘of the stock market. Around 10.7 million new demat accounts (for commerce) were opened in the Covid-marred year – nearly double of what has been the average trend over the previous three years.

Amid concerns over such rapid growth in retail, a study by the National Stock Exchange (NSE) economics team has crucial information to offer. Title Market Concentration and Retail Investment in India, the study by NSE Chief Economist Tirthankar Patnaik, has been published in the October issue of the monthly stock exchange publication Market momentum.

According to the study, not only have retail investors grown in size, but they also invest in high-value stocks and have the most diverse stock mix in their portfolio, compared to institutions.

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Net buyers

Before the pandemic, retail investors were net sellers of stocks, which means they took out more money than they put in. However, 2020 was a game-changer as Covid-19 caused people to park excess funds in the stock markets.

The study divides investors into three broad categories: foreign institutional investors or FII (foreign companies investing in Indian stocks), domestic institutional investors or DII (Indian organizations investing in stocks) and retail investors (individuals). Promoters Indian, foreigner and government – are the other type of equity investor, that were outside the scope of the study.

The study shows that retail investors were net sellers of stocks until 2019. In 2017, these investors saw a net outflow of Rs 30,500 crore. The number fell to Rs 8,100 crore the following year, but rose again in 2019 to Rs 24,500 crore.

Graphic: Ramandeep Kaur / ThePrint
Graphics: Ramandeep Kaur | The imprint

In 2020 there was a trend reversal as more individuals bought more than they sold – as a result there was a net inflow of Rs 51,200 crore. And in the third quarter of calendar year 2021, net inflows from retail investors jumped to Rs 86,000 crore.

In comparison, the net inflow of DII during the same period was only Rs 9,700 crore.

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Larger and more diversified stocks, smaller quantities

Spending by retail investors is also much more diversified than that of institutions, according to the study.

The IFIs spent less inventory and limited activities. Comparatively, national institutions had more in their mix, taking advantage of their “geographic familiarity”. But retail investors got ahead of the curve and had the most diverse portfolio, investing in 1,900 stocks.

Graphic: Ramandeep Kaur / ThePrint
Graphics: Ramandeep Kaur | The imprint

Their investment comes even as market concentration (investing in fewer and larger stocks) has increased during the Covid crisis.

“In line with what we saw in July 2020 on the overall concentration, there is a clear and generic increase in all three portfolios since mid-2017, thanks to a general feeling of risk aversion resulting from a cycle of multi-year macroeconomic decline that has driven trading in large-cap stocks, ”the study says.

Despite this, domestic institutions and retail investors continue to expand their portfolios to various stocks. However, after July 2021, IFIs are limited to growing, which is why their concentration levels have increased, he adds.

Another interesting indication from the study is that individual investors are now more interested in trading with the highest valued stocks.

FIIs and DIIs typically invest heavily in high value stocks. However, after 2017, retail investors are also moving up the ranks.

In the first quarter of 2017, the top decile’s retail value share was only about 52.4% of the gross value traded by retail investors, which jumped to 81.7% at its peak in last quarter of last year. At the end of the third quarter of calendar year 2021, the share of such inventories stood at 70.5%.

Speaking to ThePrint, Patnaik said his study shows that “the portfolio has become conservative (more weight on large cap stocks) over the years.”

“We would tend to characterize such behavior as prudent, ceteris paribus. It was only since the second quarter of 2021 that the retail investor looked at a wider universe of opportunities, and that was in line with institutional investors. FIIs and DIIs have added new stocks to their alpha-seeking portfolios, ”Patnaik said.

However, the report also notes that the average holding of retail investors, despite investing in high-value stocks, is low. About 80% of the 19 million retail investors had invested less than Rs 50,000 on average, according to the study.

This probably explains why retail investors held only 9.4% of shares listed on the NSE in September 2021, compared to 13.4% for DIIs and 21% for FIIs.

Terms and conditions apply for FD and Gold enthusiasts

The rise of retail investors is also due to the fact that traditional investment options such as term deposits (FDs) and gold are becoming less lucrative compared to the returns that the stock markets can provide.

“The net inflows over the past two years could be attributed to increased interest from retail investors who stayed or worked from home during the Covid-19 pandemic, to a shift in investment towards investment avenues at high yield from a gradual decline in real interest rates in a relaxed monetary policy environment with high inflation, ”the study said.

The trend is also accompanied by great uncertainty, as stocks are subject to market risks.

“What happened during Covid was that salaried people ended up with more disposable income because they didn’t go out. They had more time and money to invest – and in some cases they were also taking huge risks, meaning investing without doing proper research or taking advantage, ”said Aditya Kondawar, director of the operation of JST Investments, a Mumbai-based company.

“The dissemination of information on the financial markets has also made it easier for people to create videos / tweets / news articles in the form of recommendations. In some cases, they literally take quick tips from Twitter, ”Kondawar said.

“But there are no free meals in the market, so every investor has to research and only then invest / make a decision,” he warned. “People sign up for IPOs like it’s a lottery ticket. A company that wants to increase Rs 500 crore ends up increasing Rs 1-2 lakh crore and it definitely shows euphoria.

Even Patnaik said this increase in the number of retail investors must be accompanied by increased information flow for sustainability.

“Improving investor awareness and knowledge remains the key to bringing these investors to the markets in a sustainable manner, as they favorably view stocks as an asset class,” he said.

(Edited by Amit Upadhyaya)

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