The sharp 23 per cent fall in Indian markets in March that opened opportunity for stock picking saw a clear shift in the way retail investors participated in stock markets. If equity mutual funds (MFs) were the preferred route for retail investors over the last few years, investors have shifted heavily towards direct equity investment in the months since April 2020.
According to data compiled by global financial services company Jefferies, while the net inflow in equity mutual funds dropped significantly from $3.7 billion in the quarter ended March 2020 to (-)$1.9 billion in the quarter ended September 2020, there has been an exponential rise in net retail flows into stock markets. Data shows that net retail flow into domestic equities rose over 5 times from $1.2 billion in the quarter ended March to $6.8 billion in the quarter ended September.
So, in the quarter ended September, while investors pulled out a net of $1.9 billion from equity MFs, they pumped in a net of $6.8 billion by way of direct stock picking. This is line with the rush of retail investors into domestic stock markets over the last eight months after the Sensex and Nifty crashed by around 23 per cent in March, following the threat of Covid-19 vaccine and its impact on the global economy.
It is important to note that prior to the Covid-19 outbreak, mutual fund was the preferred mode of investment for retail investors. In the six years between April 2014 and March 2020, net inflow into equity MFs amounted to Rs 5.74 lakh crore.
However, over the last eight months, there has been a big rise in retail investors going for direct stock picking and there has been a significant jump in investor accounts. While the investor accounts with Central Depository Services Limited (CDSL) stood at 2.12 crore at the end of March, it jumped by 66 lakh, or 31 per cent, in just eight months to 2.78 crore investor accounts by the end of November 2020. So, the average addition by CDSL over the last eight months has been 8.25 lakh investor accounts per month.
As a result, there is a trend of retail investors bypassing MFs for equity investment. Mutual fund insiders say that they have been just monitoring this trend and have been mostly selling to honour redemption request placed by investors.
There are many who have raised concerns over the trend. “Till the time the market is rallying and investors are making money, they will not differentiate between good or bad quality stock. However, if there is an adverse market movement, many investors may get caught off-guard,” said the CIO with a leading mutual fund.
Data sourced from BSE shows that while domestic institutional investors (DIIs) sold equity holdings worth Rs 20,900 crore between July and September, the trend picked up over the last two months and since October 1, they have sold equity holdings worth a net of Rs 66,701 crore.
Since April 1, the benchmark Sensex has risen by over 50 per cent and the rally has been driven by FPI investments and direct investments by domestic investors. While the net retail inflow into the Indian equities amounted to over $10.5 billion (around Rs 77,000 crore) between April and September, FPIs (foreign portfolio investors) invested a net over $10 billion (Rs 76,375) into Indian equities in the same period. DIIs were net sellers in this period as they reduced their holdings worth Rs 7,978 crore in the six-month period.
If that transpired between April and September, the trend of FPI inflow and DII outflow has only gained further momentum over the last couple of months, when the markets have staged a sharp rally in line with news of vaccine announcement by four manufacturers around the world.
While FPIs invested a net of Rs 92,567 between October 1 and December 2, 2020, the DIIs have sold equity holdings worth Rs 66,701 crore.
Market participants say that direct stock picking by retail investors is on the rise and the CDSL added 17 lakh new investor accounts in October and November.
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