Mature retail investors ‘with a purpose’ script 30K-mark story

This new class of domestic equity investors may change the heart and architecture of the narrative of investing in stocks in the country

SENSEX RALLY

MARKETS MADE history this week and the steam unleashed is as strong as the euphoria it created. The Sensex for the first time scaled the 30,000-peak in its 40-year history, making it an attractive destination in the world now. Currently, the market is trading at 17.5 times forward earnings and we are at a sniffing distance to touch the $2-trillion market cap. At the current valuation of $1.94 trillion, the Sensex is 85 per cent of the FY2016 GDP. And this is not at all high given the projected GDP growth rate and global benchmarks.

There are many drivers that fuelled this historic rally, from macro-economic fundamentals and global flows to vibrant domestic inflows. But the most interesting facet of the story is the emergence of mature retail investors who are moving from punting to investing with a purpose. Prudence is finally prevailing over the greed among retail investors.

This rally has been driven also by our small-towns and not by FPIS or domestic institutions alone with statistics showing that 50 per cent of fresh SIP investments are coming from outside the metro cities. During the past three years equity mutual fund inflows from domestic investors outclassed the funds pumped in by the FPIS. Between April 2014 and March 2017, the period when the markets gained the maximum in the shortest period, domestic investors pumped in a net of Rs 1.95 trillion into equity schemes, excluding those into ELSS and balanced schemes, which is substantially higher than net inflows of Rs 1.53 trillion by foreign portfolio investors during the same period. In the month of April itself the net inflows from domestic funds stand at Rs 6,300 crore as against Rs 1,000 crore by FPIS. This establishes the increasing dominance of domestic inflows in strengthening the market depth.

The fast rising monthly SIP inflows, averaging at Rs 4,500 crore and growing at a higher rate than other avenues of funds, again bring in stability over the hot-money. Against an FPI inflow of Rs 55,702 crore, net inflows into equity MF schemes peaked at Rs 59,006 crore in fiscal 2017. This underlines the growing maturity of domestic investors who do not look at volatility seriously and continue to buy at dips. This is perhaps the best that has happened to Indian capital market in the recent past.

This new class of domestic equity investors may change the heart and architecture of the narrative of investing in stocks in the country. And, that is the untold story of retail investors coming of age. The new genre of retail investors are a class apart and have all the trappings to play as game changers.

The customer centric approach in SIPS, addressing both liquidity and return on investment concerns equally, have further kept the investors happy. The story of SIPS is panning out fast, thanks to the disruptive initiatives in the financial sector.

Another driver of the market is that investors are excited about the prospect of GST rollout soon which along with the fight against black money can lead to formalisation of the large informal economy substantially. The global market euphoria also contributed to the improved investor sentiment.

The losing sheen of other asset classes like gold, real estate and Bank FDS in the eyes of the investors, given the prevailing negative vibes about these asset classes, is another stir to this Bull Run. This has led to investors directing their savings into equities either directly or through mutual funds in general and SIPS in particular. So should retail investors continue to go to mid- and small caps now? Historical risk-reward data clearly establishes that there are more opportunities in large caps now than small and mid-caps after the bull run in this sector.

Should retail investors continue to lap up direct equities? My firm belief is that they should but with a great deal of analysis. Going forward, retail investors must be very careful about picking stocks as valuations are very high for some small and mid-cap stocks, whose indices have returned close to 40 per cent this year against the Sensex’s 17.7 per cent. One should only invest in companies that one knows well rather than through run-a-mill advices and tips. If you do not know the companies you are investing in, route your money through MFS to take exposure in small and mid-caps. That is the simple mantra for the times ahead.

(The writer is the MD of Geojit Financial Services Ltd)