Small investors cash out as markets rally

Market experts attributed the selling by small investors to a combination of initial scepticism about the rally and the need to meet margin calls on loss-making derivatives positions.

After investing ₹2.8 trillion in stocks during FY21-23, retail investors sold a net of ₹21,100 crore worth of stocks in the June quarter of the current fiscal year, according to data from National Stock Exchange (NSE) of India Ltd. Of this, RS 2.8 trillion, almost three-fifths was invested in FY22, with the inflows moderating to ₹49,200 crore in the previous fiscal year to selling in the first quarter of FY24. These investors prefer to buy and sell directly on the market rather than through the mutual fund route.

Small investors, or those investing up to ₹2 lakh of a company’s equity capital, cut their stakes in 58% of Nifty 500 companies that have reported their shareholding patterns thus far. Out of the 439 companies that reported their shareholdings, retail investors have cut stakes in 253, and raised stakes in 185 of the index members.

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While small investors sold their stakes, FPIs made significant net purchases of ₹1.03 trillion in the June quarter. The massive buying drove the Nifty 50 index from a low of 16,828 on 20 March to 19,189 on 30 June, enabling the market to break out of a near 20-month range of 15,184 to 18,887.60.

“Direct retail investors have become smarter with markets trending mostly one-way post the pandemic, but many also got trapped by the lure of options trading, which resulted in some of them having to sell their cash shares to meet broker margin calls from loss-making derivatives positions,” said A. Balasubramanian, a market veteran and the chairman of the Association of Mutual Funds in India.

“Those retail investors with long-term outlook are approaching the market through the mutual fund route.”

Hemant Nahata, senior vice president at Yes Securities, said index options trading and “initial scepticism” over the latest bull market rally have resulted in cash market selling by retail.

“There tends to be scepticism whenever there is a breakout like we are seeing,” Nahata said.

“There is also this penchant for index options trading, which means that many retail investors will sell cash to meet margin to trade requirements on, say, Nifty or Bank Nifty options, besides some possible selling to meet mark to market losses.”

Index options—Nifty and Bank Nifty—account for almost 98% of the total ₹19.79 quadrillion derivatives’ notional turnover so far this fiscal year. Retail investors have net invested $107 billion into equity options so far this fiscal, NSE data shows.

The steepest reduction in stakes by FPIs during the June quarter was seen in NCC Ltd, Page Industries ltd, Engineers India Ltd, Bharat Heavy Electricals Ltd, and RBL Bank Ltd, where stakes were either sold entirely or reduced to levels ranging from 0% to 10%.

Sequentially also, investors sold in 56% of the 439 companies while keeping stakes unchanged in barely 1% of them.

Siddhartha Khemka, the head of retail research at Motilal Oswal Financial Services, the largest physical broker, feels that retail investors have turned savvier in the past three to four years and have used the current market rally to “book profits.”

He expects the retail investor to develop conviction in the present rally “sooner or later with FPI investments continuing apace with India being one of the most promising emerging markets to invest in.”

Khemka expects strong quarterly earnings by banks to offset the loss of momentum by IT companies because of the slowdown fears in Europe and the US. The rise in market valuations from the low of 20 March to the 30 June end is evident, with the price-to-earnings multiple of Nifty increasing from 20.2 times to 22.36 as the market rose from 16,828 to 19,189 over the period.

Updated: 24 Jul 2023, 12:40 AM IST