When the world was grappling with the economic and social repercussions of the Covid-19 pandemic, equity markets worldwide cheered the policy response in the form of unprecedented monetary and fiscal stimuli. Retail investors also joined the party, both in the developed world and in emerging markets, especially in India. Participation in the market is both direct and indirect. In India rising indirect retail participation is visible from a steady increase in ownership of domestic mutual funds into Indian equities during this period, benefiting from robust SIP (Systematic Investment Plan) inflows. Average monthly SIP inflows shot up by ~30% YoY to Rs 104bn in 2021-22, rising by a further 17% to Rs 121bn in the first quarter of the current financial year.
The last couple of years have seen an even higher jump in direct participation in search of better returns given the lacklustre performance of other asset classes. A sharp market crash in March 2020 after the onset of the pandemic lured retail investors into trading in equity markets, with a strong market rebound thereafter further strengthening their sentiments. There has been an unprecedented influx of new investors into Indian equities during this period, reflected in the jump in investor account additions with depositories, and client registrations with exchanges.
NSE data shows that retail investors turned net buyers of Indian equities in 2020 after an 11-year long hiatus, and significantly so over the subsequent 18 months.
This is nearly 88% of net investments made by domestic institutional investors during this period across exchanges and has translated into a steady increase in retail ownership in Indian equities.
A sharp surge in retail flows is also reflected in a commensurate increase in their share in total capital market turnover at NSE. The share rose from 33% in FY16 to 45% in FY21, only to fall marginally to around 41% in FY22, and then to 37% this fiscal, partly attributed to the market correction that has kept investors on the sidelines.
In line with the influx of new investors into Indian equity markets in recent years, the number of retail investors trading in the NSE’s cash as well as equity derivatives segments had nearly tripled since Jan 2020, to peak off at well over 10 million in January 2022. Despite the drop in participation from the investor pool this year, it remains well above pre-pandemic levels.
Dwelling further into retail investors’ behavior since the pandemic, we have looked at unique active investors for each quarter and tracked their participation in the subsequent quarters. Active retail investors here are individuals that have traded at least once during the quarter. Each series in the figure below starts with a cohort of unique investors during that quarter, with subsequent datapoints representing the number of investors from the initial cohort that have traded in respective quarters.
The analysis provides some interesting takeaways.
The active retail investor base has risen dramatically from around 6 million in Q1 2020 to around 17 million in Q1 2022, something that’s corroborated by the surge in new investor accounts and net investments—only to fall marginally to around 15 million in the second quarter.
The increase in the active investor base has always been accompanied by buyer’s remorse—investors stop trading in the immediate period after their entry into the market. This trend has become more prominent in recent quarters, with the June quarter not only seeing the highest level of buyer’s remorse but also a drop in unique investors for the first time during the period of study. That said, investor participation seems to stabilise thereafter, highlighting the behaviour of so-called steady investors.
Even as there has been an expansion in active retail investors since the pandemic, their aggregate turnover—defined as average of aggregate buy and sell traded value—in the market has been slackening over the last few quarters. Aggregate turnover of this segment saw an increasing trend for each quarter’s cohort until mid-2021, partly depicting herd behavior in the wake of booming markets, followed by a steady drop over the subsequent four quarters. While a part of this declining activity reflected profit-booking initially with an aim to capitalise on the bull run seen in the previous quarters, it is also a testament to cautious participation amid lackluster market performance. Market performance is seen to have a deeper impact on retail trading activity vis-à-vis participation.
The entry of retail investors has been a stand-out feature of the Indian equity markets since the beginning of the pandemic. Interest in participation (numbers), investment (net inflows) and activity (turnover) have moved in line with the market, exhibiting traits well-known in behavioural finance (exuberance, buyer’s remorse). With the market’s correction this year, investor participation is getting back to being led by the steady investor, but numbers remain meaningfully higher than pre-pandemic levels, implying the new investors are here to stay.
Tirthankar Patnaik is Chief Economist at the National Stock Exchange of India. Views are personal.
The views expressed here are those of the author, and do not necessarily represent the views of BQ Prime or its editorial team.
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