Retail investors are the new bulls in equity markets

The sharp rise in trading turnover in the past few months has boosted stocks. Since 1 April this year, the Nifty 50 gained 29.48% to hold the 11000-mark. The Nifty Mid-Cap 100 and the Nifty Small-Cap 100 have gained 31.78% and 37.08%, respectively. Mint probes the phenomenon.

What are the factors driving the markets?

Global central banks have unleashed massive amounts of liquidity to tide through the crisis since March. Some of that liquidity is finding its way into the equity markets. This has seen global and domestic markets post sharp gains. Over the past several months, foreign investors have been purchasing equity along with domestic and high-net worth investors. Retail investors have also stepped up their participation in equity market. Retail turnover has increased to about 57% of the average cash volumes on the exchanges in the first quarter FY21, according to brokerage firm Motilal Oswal Financial Services.

What is pushing retail investors to equities?

Interest rates on fixed deposits and other fixed-income instruments have been sliding. This has reduced yields in the hands of investors. Besides, investors are reasoning that stock prices have been beaten down because of the market meltdown in March. The imperative of working from home has given investors time to explore equity as an investment. Further, technology has allowed investors to join various trading platforms because of the online KYC norms. Online tools and mobile apps have mushroomed, making it easier for people to invest in stocks. Internet and mobile-based trading made up nearly 37% of cash trades in June.

What is the rate of retail investors’ participation?

Retail investor turnover on the bourses has sharply increased even as overall cash volumes have swelled. Retail investor turnover in the first quarter of the current fiscal has shot up 78% from the year-ago period to ₹33,731 crore in the cash segment. The number of demat accounts have also jumped by 2.9 million from January this year till May.

Which retail segments are investors targeting?

Retail investors have been participating across the valuation spectrum, but there has also been an increase in participation in the mid- and small-cap segments. The overall turnover is rising, but volumes in mid- and small-cap segments have recently increased to a considerable extent. Retail investors tend to participate in a big way in small- and mid-cap segments. The small- and mid-cap indices lagged the broader market last year, but so far in FY21 both these indices are outperforming the broader market.

Will retail flows sustain market performance?

Data has shown that investors enter the market when it tends to peak. This time, however, retail flows and market performance have been strong, suggesting that investors have played some role in recovery since March. Brokerages note that when retail flows are strong, stocks turn negative in ensuing months. Many investors are entering the markets in recent months after the market has risen from its March lows. Many stocks have also seen increases in the past few months, with elevated returns. This could lead to reduced returns.