The return of retail

Wooing retail investors to the equity markets has been a pet project with policymakers for about six years now. On the face of it, there is cause for some cheer. Retail ownership of NSE-listed stocks hit record levels in March 2015. Small investors now own 21.4 per cent of all outstanding stock on the NSE, which is valued at ₹7.94 lakh crore, an appreciation of around 50 per cent in one year, according to estimates. But delving deeper into retail ownership patterns suggests that it is too early to celebrate.

While it is good news for the economy that retail savers have begun to prefer equities over physical assets, the timing for this switch leaves much to be desired. After shunning stocks when they traded at bargain-basement prices between 2011 and 2013, small investors have essentially warmed up to them at fairly stiff valuations. This suggests that rather than buy equities for long-term wealth creation, many retail investors continue to have a pop at stocks as a quick and opportunistic high-return gamble. There is also a worrying tendency to gravitate towards poor quality stocks. Retail ownership is the lowest in Nifty constituents and it rises as one goes down the market-cap rankings. This is exactly the opposite of how foreign portfolio investors (FPIs) and domestic institutions have invested in this bull market. With the economy not fully out of the woods and corporate earnings struggling, the smart money in India has made a beeline for quality stocks. Finally, despite the clear limitations in their stock selection skills, small investors continue to dabble directly in shares rather than entrust their money to professional money managers. The value of the direct equity holdings of small investors, at ₹7.94 lakh crore, is over four times their holdings in mutual funds (₹1.92 lakh crore).

Poorly timed purchases in poor quality portfolios will come back to bite retail investors, when the tide turns. If the recent market correction continues, or if foreign flows dry up, retail stock portfolios will be far more vulnerable than those of FPIs and domestic institutions. Regulators and financial firms need to step up efforts to persuade retail investors to route their money through mutual funds or the National Pension Scheme. As retail investor fancy for direct equities is unlikely to wane immediately, other initiatives are needed as well. Investor education initiatives may now need to move beyond harping on the “long-term” benefits of equities, to actually equipping small investors with the company information, research and basic balance-sheet skills they need to avoid the big mistakes in equity investing. Only this will ensure that small investors retain their hard-won faith in equities.

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