The Robinhood investors in India had a great year

What do we mean by Robinhood investors?

The term “Robinhood" comes from customers of the US brokerage Robinhood, which offers online and free trading in stocks. The brokerage attracted hordes of US investors in 2020 when the covid curbs forced people to stay at home and many received stimulus cheques from the government. Robinhood investors have been derided for focusing on poor quality firms or overvalued ones. India witnessed its own version of the Robinhood surge when large numbers of retail investors opened demat accounts between March and May 2020. Equity mutual funds also witnessed record inflows in March 2020.

Do these investors make poor choices?

Aggregate data shows India’s Robinhood investors to be contrarians. They focused on stocks during the lockdown in the first quarter of 2020 and were rewarded handsomely by the rally that followed as the economy opened up and foreign portfolio investors (FPIs) returned to India. This suggests that such investors do not always come in at the top of a bull market but buy when there are dips and sell when markets reach new highs. On the flip side, companies whose stock prices fell sharply in the past 1-2 years have seen huge retail accumulation of stocks. Only time will tell if these were sound contrarian moves.

What propelled the rise of such investors in India?

Several factors are behind the rise of Robinhood investors in India. Discount brokerages have drastically lowered the cost of stock trading and an industry-wide shift to online trading made it easy for individuals to trade from their bedrooms. This allowed retail investors to easily start trading when the lockdown was put into place to curb the spread of coronavirus.

Do they represent a shift away from MFs?

There have been large net outflows from equity funds, which are favoured by retail investors. At the same time, a large number of demat accounts were opened in the April-June quarter of FY21 suggesting that such investors were trying their hand at stock trading instead of leaving it to a fund manager. However, it is unlikely that self-traders have fully abandoned MFs. Instead many investors are likely to have both types of accounts. Tech startups are providing solutions such as model portfolios, which traders can buy.

What precautions can these investors take?

Retail investors trading on their own can follow some guidelines to protect themselves from steep losses. First, they should avoid any kind of leveraged products such as intraday trading or futures and options. Second, they should stake a relatively small part of savings in trading so that losses in the market do not imperil their financial future. Third, they should identify conflicts of interest among market experts on social media and TV channels. Rather than blindly following someone’s advice, they should do their own research also.