SIP trend shows more investors seek to make direct bets in stocks

A new stream of retail investors with high risk appetite is flocking to equities, often taking aggressive bets on penny stocks, in search of outsized returns at a time performances of other asset classes remain subdued because of the haze of uncertainty around covid-19.

Market watchers say that the steady decline in systematic investment plan (SIP) inflows since April is reflective of this trend, where retail investors have begun to withdraw money from mutual fund schemes to invest directly in stocks.

“We are seeing a surge in new demat accounts since March this year,” said Nikhil Kamath, co-founder and chief investment officer, Zerodha, a stock trading platform. A large number of these new investors are in their early 30s and are beginning to enter stock markets on their own and in many cases with initial investments close to ₹80,000, he added. “Clearly, many investors are no longer willing to let third parties manage their funds and are preferring to do it themselves.”

The number of demat accounts opened during January to May surpassed the overall client growth figures of last year, according to Zerodha. The brokerage has added over 750,000 accounts since the end of February, Mint reported on 26 June.

According to the Securities and Exchange Board of India (Sebi), the number of new demat accounts opened in fiscal year 2020, was the most in at least a decade at 4.9 million, a 22.5% jump from the 4 million accounts opened in the previous year.

Market watchers say one of the key factors behind the growing risk appetite of retail investors is the sharp correction in the broader market following the coronavirus outbreak. “People are willing to take a leap of faith on some stocks where they see potential of above-normal returns which may never be possible in mutual funds,” said the CEO of a leading wealth management firm, seeking anonymity.

Amfi data showed SIP inflows declined below ₹8,000 crore for the first time since November 2018, touching ₹7,927.11 crore in June, from ₹8,123,03 crore in May, and ₹8,376.11 crore in April. June SIP figures were the lowest since November 2018.

At the end of April—the latest available data—there were 19.7 million new dematerialized, or demat, accounts at National Securities Depository Ltd and 21.8 million accounts at Central Depository Services Ltd.

A sizeable chunk of retail investments, meanwhile, has gone to the small caps segment, which has rallied more than the broader market. As a result, many penny stocks also have seen robust rallies, rising more than 11-fold.

BSE data showed that at least 25 penny stocks have become multi-baggers, surging 100-1,240% in the first half of 2020. Examples include Hathway Bhawani Cabletel and Datacom Ltd, both of which have so far offered a whopping 13-fold returns to investors rising from ₹3 to ₹40.2 in the January to June period.

Experts, however, warn against investing in speculative stocks.

Jaideep Arora, chief executive of Sharekhan by BNP Paribas, said, “It is great to have a high retail participation. One can say typical retail investors buy when the market is too high and sell when it is falling. In 2020, we have seen retail investors started rushing when the market fell strongly. This is a strong proof of maturity.”

“To minimize risk, retail investors should follow the SIP route and take professional guidance to ensure they invest in firms with strong fundamentals for the long term,” Arora said.