Retail investors change tack to buy on every dip

It is believed that retail investors sell stocks in a falling market and buy them when prices peak. However, lately, they have done the opposite; probably having learnt lessons from the bull market of 2009-10. Data from the stock exchanges show that retail investors have been buyers in the market every time the Sensex declined, since January.

Over the last eleven months, there have been ten occasions when the Sensex has tanked more than 300 points in a single session. Retail investors put in fresh money on a net basis on all those ten occasions. FIIs predictably sold. A few recent instances: On October 3, when the Sensex dropped 300 points following Moody's downgrade of State Bank of India, FIIs pulled out Rs 826 crore (net), but retail investors were net buyers with purchases of Rs 55 crore on the BSE and Rs 368 crore on NSE. Again, last Thursday, the Sensex lost 314 points on a sharp correction in European stock markets after European Central Bank intervention, individual investors put in Rs 56 crore into stocks on the BSE and Rs 108 crore on the NSE.

Mature behaviour

What has driven this change in attitude of Indian retail investors? Retail investors are more mature now, says Mr Sandip Sabharwal, CEO Portfolio Management Services- Prabhudas Lilladhar. “Today, there is a higher level of maturity among Indian investors with regards to their investments in equities. After looking at the last few cycles investors have realised that over a longer term time frame there is a low probability of losing money in the equity markets.”

Low inflation-adjusted returns from debt options may have also led individual investors to conclude that equities may be a better bet for the long term. Data from the two leading depositories — National Securities Depository Ltd and Central Depository Services (India) Ltd show that new investors have continued to come into the equity market over the last year. Even with no big IPOs (it is IPOs that usually trigger new account openings), close to ten lakh demat accounts were opened between January and September, not much lower than the 12 lakh accounts added in the same period last year. Mr Sabharwal adds, “A large number of investors have not invested in equities in a big way over the last four years even as their incomes and savings have grown. Corrections in the market are thus being used to increase exposure to equities.”

There may also be a trend of existing investors averaging their holdings at lower levels, say some brokers. Mr Vishal Gulechha, Head of Online Broking, ICICI Securities, said, “There could be many investors who were already invested in the market. Because of severe correction in prices, they are averaging their cost by buying more of the same stock now.”

SIPs play a role

Market observers say the concept of systematic investing that has been marketed by mutual funds has also brought about a change in the retail investor mindset. Small investors now seem to invest in equities irrespective of how markets move. Data from the mutual funds body- AMFI show net inflows into equity funds picking up whenever markets have declined sharply.

In January, when Sensex had corrected 10 per cent, equity funds registered net inflows of Rs 881 crore. In August again, when Sensex fell eight per cent, the net inflow into equity schemes was Rs 1,942 crore. Mr Sabharwal says, “Mutual fund houses have sold the concept of systematic investments into equities very well and as such there are a large number of investors today who are investing in equities on a regular basis without bothering about short term market movements. ” Overall, about 25 per cent of the total investments into equity funds today come from monthly systematic investments.

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