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Explained: Rush of new investors, and market veterans’ concerns

There are concerns about how a large number of "new investors" would react if the markets were to fall by 10-15%. Also, would a panic reaction lead to a loss of capital for them and aggravate the fall?

Big absolute numbers such as the Sensex scaling 50,000 and 60,000 had drawn in the new investors. (File Photo)

If the Sensex regularly breaching new milestones has enthused investors and attracted new ones, it has now also started causing anxiety among many. While seasoned investors recognise corrections as part of a healthy market movement, they are now concerned how a large number of “new investors” would react if the markets were to fall by 10-15%. Also, would a panic reaction lead to a loss of capital for them and aggravate the fall?

Investor growth

Equity markets have witnessed a large influx of retail investors over the last 18 months — both in mutual funds and direct equity. The number of investor accounts with Central Depository Services (India) Limited (CDSL) has more than doubled from 2.12 crore in March 2020 to 4.64 crore in September 2021. In fact, more than half of the additional 2.52 crore accounts — 1.3 crore — have come in the last six months between April and September 2021.

Even NSDL added nearly 27 lakh accounts between April and September 2021, taking the total accounts to 2.37 crore.

Heads of broking institutions say a large number of these new investors are individuals in their 20s and a large number of them are trading in futures and options, which is a more risky segment. Most of them are inexperienced and don’t understand equity markets too well. A financial services leader in Kerala shared an anecdote: recently, after booking for an electrician on an app, he called the electrician to check when he would come. The electrician said he would only come around 4pm. Why so late? “Until 3:30, I trade in the stock market.”

This trend is discomforting, say market participants. Besides the rise in Sensex and scaling of fresh milestones — thrilled new investors often like to boast about their newly acquired money-making skill — other factors too have played a part in their entry in the markets. One factor has been the ease of access to stock market investing through mobile apps and discount brokerage. However, having ease of access should not be mistaken for having investment expertise, seasoned investors say.

If markets fall…

With these new investors only having experienced the big upswing in the markets over the last 12 months, even seasoned fund managers at leading mutual funds seem concerned — more so by the risky bets the new investors have been taking in futures and options trade.

“Many new investors are taking positions in the F&O market and are not aware of the risks of that segment,” said the CEO of a leading mutual fund, expressing concern over how they may behave at the time of a correction. While investors need handholding at times of correction, experts feel panic selling may have a cascading impact and exacerbate the fall in the markets.

After big absolute numbers such as the Sensex scaling 50,000 and 60,000 had drawn in the new investors, these numbers going down may also create a scare. In absolute terms, a 10% fall from levels of 60,000 — or about 6.000 points — would appear, to inexperienced investors, to be much bigger than a 10% fall when the Sensex was at 10,000.

Dos and don’ts

Although the capital markets regulator Sebi has enhanced surveillance mechanisms to detect insider trading and unfair trading practices in the market in a bid to protect the interests of retail investors, it is important for retail investors to be cautious where they invest and how they invest. Investments based on WhatsApp messages should be avoided, and one should enter stocks as an investor and not as a day trader.

Retail investors must understand that if there is a correction, it could be on account of global or domestic factors and could last for a week or a month or longer. The market may recover soon if the underlying fundamentals of the economy remain strong — which holds true for India — and investors must avoid pressing the panic button. If there is a fall, seek professional advice on how to navigate it.

One should follow the basics at all times — study and understand the business of the company, its promoter and its financial strength. If one has invested in a fundamentally strong company, it will bounce back along with the markets as in the past.

Investors must understand that ease of access to investment doesn’t mean they don’t need advice. They must seek professional advice, handholding and guidance, and should have rational return expectations from equity investment.

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