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In April, inflows into systematic investment plans (SIPs) of mutual funds fell around 3.8% month-on-month to 11,863 crore. A SIP is a mode of investment primarily into equity mutual funds. In that sense, an person investing through the SIP route is largely buying stocks indirectly. In fact, in the seven months from October to April, total investments made through the SIP route stood at 79,975 crore.

Interestingly, SIP investment remains strong even as foreign institutional investors (FIIs) continue to sell Indian stocks. From October to April, the FIIs sold stocks worth 1.66 trillion. This selling has continued this month as well, with net sales up to 18 May amounting to  30,394 crore.

Us and them
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Us and them

Over and above this, investors continue to open demat accounts at a fast pace. From the end of December 2020 to March 2022, the latest data available, the number of demat accounts went up by 80% to 89.7 million. The BSE Sensex reached its highest ever level on 18 October at 61,766 points. Even from November to March, the number of demat accounts has gone up by 22%.

High retail interest in the stock market tells us several things. First, the average retail investor came into the stock markets only after it had rallied considerably. The BSE Sensex closed at a low of 25,981 points on 23 March 2020. By 31 December 2020, it had rallied by 84% to close at 47,751 points. This rally gave the average retail investor the confidence to invest in stocks by opening demat accounts.

The average monthly inflow into SIPs since the end of December 2020 has been more than  10,000 crore. It was at 8,100 crore between January 2020 and December 2020.

This tells us 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 higher the demand. In case of investing what works is the reverse—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 in the month that the BSE Sensex peaked.

Second, the easy money policy unleashed by the Reserve Bank of India to help the government borrow at low interest rates pushed people to look for higher returns and, hence, money found its way into stocks, ultimately fuelling a bubble where stock prices were totally out of sync with expected earnings.

Third, retail demand for stocks helped loss-making companies launch and complete their initial public offerings (IPOs). Some IPOs were totally or partly offers for sale, where promoters cashed in on their equity by selling it to the public. Post listing, most of these stocks have turned into massive loss-making propositions.

Fourth, retail demand for stocks has helped even a recent IPO such as Delhivery. The retail portion of the IPO was undersubscribed at 0.57 times. However, the overall IPO was oversubscribed 1.63 times primarily because the qualified institutional bidders (QIBs) category was oversubscribed 2.66 times. QIBs are basically financial institutions such as mutual funds, insurance companies and FIIs. The money invested by mutual funds and insurance companies is ultimately retail money. Simply put, money coming into SIPs continues to finance IPOs.

Finally, if the retail money hadn’t continued to come into the stock market in various ways, FII selling would have led to a bloodbath by now. The continuous buying by retail investors has helped prevent that. This is largely in line with what happened post 2008, where FIIs buy in years when valuations are low and sell in years when valuations are high. Retail investors do the opposite.

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