What will be the breaking point of retail investors amid the ongoing bear assault? Old retail investors have possibly poured larger sums of money in stock market at higher levels, while the new investors have not had a great experience so far, making Kotak Institutional Equities wonder whether the retail army may still hold the fort.
It said the price-agnostic investment behavior of retail investors and continued purchases of stocks directly and indirectly had led to overvaluation in the market for the past 9-12 months and prevented a larger and swifter correction in the market.
The brokerage said the stock market could already be on thin ice based on the usual trailing-returns argument for investment by retail investors. A 12-month trailing returns have turned weak while three-month and six-month returns are now negative. Taxes and trading costs would only further dent the returns of investors, it warned.
"The investment behavior of retail investors over the next few weeks would be interesting to see," Kotak said.
Foreign investors have been aggressive net sellers over the past few months while DIIs have been absorbing the same. "Our analysis shows that returns of retail investors have been far lower than returns of SMID indices—retail investors have invested more funds at higher market levels. Could the ‘breaking’ point of investors be a lot closer than is generally believed," it asked.
Kotak said it is assuming that new investors in the last 12 months would have low risk appetite and understanding of stocks. They might be nurturing large losses in their portfolios, it said.
A decent portion of investors in mutual funds have come into the market in the first nine months of FY25 and a large number of retail investors have become new shareholders in several ‘narrative’ stocks during this period when returns have been low or negative, it noted.
In the case of ‘old’ investors, it assumed 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 and thematic funds.
Many of these funds raised money through NFOs at the peak of those sectors or themes. Fund flows in 2024 was 25 per cent higher than cumulative fund flows of 2022-23 and sectoral and thematic funds accounted for 40 per cent and 37 per cent of inflows of 2024 and first six months of 2024.