Amateur Investors Riding Sentimental Rally
Sebi reveals that about 54 per cent of the shares (in value terms) allotted to investors were sold within a week from listing
With around 17.1 crore demat accounts, over Rs 85,000 crore through systematic investment plans (SIPs) and around 50 initial public offerings (IPOs) listed in 2024 so far, Indian stock market benchmark continued to receive fresh-peaks in the recent trading session.
The benchmark index, Nifty delivered around 15 per cent returns year-to-date (YTD) boosting investors’ confidence in the Indian stock market.
Notably, the participation of retail investors also surged while continuing to balance the foreign institutional investors (FIIs) outflows. In the last five years, Nifty delivered over 125 per cent returns compared to around 75 per cent returns in gold in the same period.
“The post-covid retail rally saw a significant uptick in direct market participation, with monthly SIP contributions crossing Rs 23,000 crore by 2024. However, it remains to be seen if retail investors can withstand any harsh correction, as over 60 per cent of new investors entered the market post-2020, largely driven by bullish sentiment,” said Narinder Wadhwa, MD & CEO, SKI Capital Services, Co-chair, Capital and Commodity Market, PHDCCI.
The stock market euphoria was also reflected when an SME IPO, Resourceful automobile which attempted to raise Rs 12 crore received bids worth over Rs 4,700 crore.
Recently, the market regulator, Securities and Exchange Board of India (Sebi) published its study pertaining to the behavioural changes in the IPO trends. One of the most highlighted insights suggested that about 54 per cent of the shares (in value terms) allotted to investors were sold within a week from listing.
During the period under the study, out of 144 issues as many as 92 issues were oversubscribed by more than 10 times. Study revealed a positive association was observed between IPO subscription, listing day returns, and exit of investors. Higher subscription was associated with higher listing day returns and in turn higher exit by investors.
“The oversubscription in IPO is caused by a market boom in the last 4 to 5 years and people have seen an upfront swing and want to make quick money and exit. Sebi has put certain mechanisms but the funds are accessible to people and there is a rotation of funds. Also, the advantage when people get out, they have the liberty of getting into another IPO so that's the trend that cannot be discounted,” said Sethuratnam Ravi, Former BSE Chairman, Founder Ravi Rajan Company.
Indian Derivatives, The Losing Game
Over the years the retail participation in the Indian stock market has massively increased particularly during covid period. The total daily volume of derivative contracts holds Rs USD 4.3 trillion per day.
According to a report by Axis Mutual Fund, the derivatives segment has grown 4 times to 4 million from 0.5 million in 2019. The derivatives trading contribute to more than 99.6 per cent of daily volume boosted by daily expiry of indices on different days.
Originally the derivative tool was devised to hedge risk but the fantasy of huge profit has transformed into a risk taking device. According to a 2019 sebi report 9 out of 10 traders lose money in the derivative segment with the average value of Rs 56,000 per person.
Such trades are speculative in nature as traders hold the positions for the average of 30 minutes. Only 1 out of 100 contracts are carried forward to the next day. In fantasy sports, the take rate of the pot is 15 per cent.
“Several factors have influenced investor behaviour of late. Online influencers having a strong influence on the investor psyche, lack of experience of going through market cycles, lack of understanding of such financial products and the inherent risks are impacting investors. Many of the retail investors in such markets intend to make a quick buck and want to generate a secondary income from such instruments rather than looking at the markets as a means of long-term wealth creation. Lack of capacity to hold investment or roll over or convert positions is also a deterrent,” said Divam Sharma, Founder and Fund Manager, Green Portfolio.
Harsh Corrections
The pandemic crash of 2020 still brings souvenirs of the mega bear market. On 23 March 2020 the Sensex and Nifty fell over 13 per cent after the government declared nationwide lockdown. Out of 2,401 stocks regularly traded on the BSE, 2,036 stocks declined, and merely 233 advanced.
The bloodbath was not limited to a single day. The downward journey went on for many days. During the period, the Sensex dropped from the level of 42,273 to 28,288 in one week.
“The new retail investors have only seen the upcycle that came from the revival of the significant fall in the market, during which every stock that was fundamentally strong and companies with multiple red flags, the requirement of proper fundamental analysis was quite low as all the stock became multi-bagger. But now as the cycles are starting to play out in multiple industries the risk has been rising for the retail investor, said Sharma.
Road Ahead
The market is poised to grow in the long-term, however the mid and short term movements create a spike in volatility as also reflected in the historical data.
The global market along with the Indian market now eye for the US Fed rate cut stance. The 25 or 50 basis points (bps) will determine the further equity market journey in the absence of fresh cues. The Sebi’s push to tighten F&O rules, mega IPO debuts, and AMFI data on August month SIPs could also further determine the investers’ sentiments.
