Market direction hinges on behaviour of retail investors: Kotak Institutional Equities

The behaviour of retail investors over the next few weeks or months could determine the course of the Indian market, said a note by Kotak Institutional Equities.

The brokerage analysis shows that returns of retail investors have been far lower than returns of small- and mid-cap indices — retail investors have invested more funds at higher market levels. The returns of headline indices (large-cap, mid-cap or small-cap) may overstate the actual returns of investors because of the number of investors that have come to the market at higher levels and more money could have come ‘into’ at higher levels. Taxes and trading costs would further dent the returns of investors.

“The market could already be on thin ice based on the usual trailing-returns argument for investment by retail investors. Could the ‘breaking’ point of investors be a lot closer than is generally believed?” the brokerage asked.

Retail investors’ price-agnostic investment behaviour (until recently) and the continued purchases of stocks directly and indirectly through DIIs have pushed up valuations in the past 9-12 months and prevented a larger and swifter correction, the note said. Foreign investors have been aggressive net sellers over the past few months, while DIIs have been absorbing the same.

New vs old investors

The brokerage said that ‘new’ investors (last one year or so) would have ‘low’ risk appetite and understanding of stocks and may be nurturing large losses in their portfolios. A large number of retail investors may have become new shareholders in several ‘narrative’ stocks where returns have been low or negative.

“We estimate that ‘old’ investors would have a ‘higher’ weighted-average price of acquisition of stocks given the timing of inflows into the market directly or indirectly through domestic equity mutual funds and a high weighted-average price of acquisition of stocks pertaining to sectoral/thematic funds, given that many of these funds raised money through NFOs at the peak of those sectors or themes,” the note said.

Inflows into sectoral/thematic funds stood at ₹1,55,700 crore in CY24, more than three times any of the individual equity categories.