Market call: Reverse the exodus of retail investors to raise the stock market’s efficiency
An equity market that’s increasingly dominated by big investors won’t serve us well. The wider the spectrum of views that go into prices, the better. We need exiting retail investors to return in droves and participate directly by trading stocks.
Fewer retail investors making direct trades in India’s stock market can broadly be explained by red ticker tapes and price volatility having sent individual participants into the relatively safe arms of mutual funds (MFs). Almost a year on, key market indices are yet to recover the peaks they hit in 2024.
Data from the National Stock Exchange (NSE) shows that its active retail traders—who trade stocks at least once a month—dropped from a record 15.7 million last September to 10.7 million at the end of August.
Separate numbers show that India’s count of unique MF investors went up from about 50.1 million to almost 56.4 million over roughly the same period; this includes big-entity MF holders too, but was probably driven by households looking for experts to multiply their wealth.
Such a shift is both plausible and sensible. A longer look at the share of direct retail participation in the NSE’s cash market, however, reveals a shrinkage that began with covid year 2020-21. From a high of 45% that year, this share shrank to 34.2% in 2025-26 till August, with big non- retail traders making up the rest of the pie.
This sounds odd, given how share prices surged in the pandemic’s wake amid a retail frenzy for new demat accounts; more than 100 million were opened over the four years till 2023-24.
A sizeable chunk of this influx, it would seem, was not aimed at cash trading; instead, it fuelled a startling boom in derivatives, one that India’s market regulator had to come down hard on for the safety of novices taking wild punts on complex futures and options (F&O).
Taken together, a shift in favour of MFs and the regulator’s pushback of rookie derivative trades would suggest our equity market has sobered up and we are headed the right way now. That experts should manage stocks on behalf of retail investors has been promoted heavily as an axiom, with public buy-in evident in the MF industry’s resilience. That the casino-like air of the F&O segment was in need of a regulatory dampener was clear too, given its glaring signs of excess.
However, while rising expertise at play could make the market safer overall by reducing ‘noise’ (and its disruptive potential), a reversal of today’s retail trend would arguably serve our equity market better. A shrinking share of direct stock trading by individuals acting on their own implies a loss in the diversity of views that feed market outcomes.
Financial markets thrive on blending as wide a range of outlooks as possible—bearish, bullish or tentative—into their process of price discovery. Indeed, this is what gives a market efficiency, even if it can never claim the perfection of being ‘fully informed.’
Retail investors are not only sprawled across the country in large numbers, since they have a wide variety of viewpoints, their participation buffers us from the ‘groupthink’ that big buyers might find hard to resist. For a more efficient market on the whole, therefore, we need more people at trading screens, not fewer.
So far, so theory-led. India’s retail space seems to have polarized in recent years, with MF-happy investors on one side and F&O-dazzled punters on the other. For a reversal of the retail exodus to drive market efficiency, we need a lot more people to invest the classic old way: study companies for where earnings are headed, buy the shares of winners and then track them to see if they should be replaced with other picks.
In time, more minds whirring away should work in favour of all investors.
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