Mumbai: The pace of retail investor flows into the stock market could reduce as the trailing 12-month returns drop towards ‘0’ in another three to four weeks, said Jefferies. History shows that a sustained property market boom and higher market volatility also impact flows from smaller individual investors, the brokerage said.
Between March 2020, when the Nifty hit a four-year low of 7,511.1, and October 2021, when the index touched an all-time high of 18,604.45, the stock benchmark has risen nearly 148%. Retail investor participation has multiplied and touched 2.71 crore accounts as of April 30 this year also on account of low returns from other asset classes, mainly fixed deposits and real estate.
Analysts said most retail investors project returns on asset classes like equities on the basis of the recent performances — typically the past 12 months. If trailing returns for the market come under pressure, they could reconsider their holdings in stocks as against fixed income.
“Fixed deposit rates will also increase as the RBI raises interest rates. Their relative view of asset classes across equity and debt may change accordingly,” said Sanjeev Prasad, co-head, Kotak Institutional Equities. “We may see a lower amount of fresh money coming in and also discontinuation of a portion of SIP accounts as and when their tenures get over.”
Retail flows into equity mutual funds have been the mainstay of the domestic stock market amid the record selling by foreign investors. In April, retail investors continued to allocate money to equity schemes albeit at a slower pace compared to the previous two months. They bought equity mutual funds worth ₹15,890 crore as against the previous month’s ₹28,463 crore and February’s ₹19,705 crore. Collections through systematic investment plans (SIPs) dipped to ₹11,863 crore compared to ₹12,328 crore in the previous month.
Domestic participation has broadened over the last one year with the mutual funds retail-equity folio count and Systematic Investment Plan (SIP) accounts up by 29% and 42%. The number of demat accounts is up 63% from year ago levels and Jefferies estimates that over the last two years an inflow of $36 billion has been seen directly into stocks from retail investors.
Retail inflows cannot be taken for granted, said Jefferies’ India Strategist Mahesh Nandurkar.
“Our analysis of past 10-yr data of monthly flows versus trailing 12-month Nifty returns shows a few instances (late 2015, early 2016, large part of CY19) where market returns dropped to 0% or lower caused inflows to reduce meaningfully,” said Nandurkar in a client note.
Retail investors’ direct equity participation is also already pointing to some cooling off.
“Some recent data does show that direct retail activity in the market may be tapering off though. New demat a/c openings were -12% QoQ (quarter on quarter) in the Mar’22 qtr. Also, the non-institutional share of market volumes has declined by 8 percentage points to closer to average levels now,” the Jefferies note said.
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