How retail money sent the market to life highs

Thanks to net equity inflows via mutual funds hitting ₹1.54 trillion, up 59% from 2021, the Nifty staged an impressive recovery from a 52-week low of 15183.4 around mid-June through a record high of 18887.6 on 1 December, a near 25% spike. Against this, the Dow Jones currently trades almost 10% below its record high.

Equity inflows have been supported largely by systematic investment plans (SIP), which for many retail investors have become akin to a bank fixed deposit as lumpsum flows have slowed.

SIP flows rose to a record high of ₹13,306 crore in November, while growing to a little more than ₹1 trillion in the fiscal year through November (FY23 so far). If flows remain consistent, they could surpass the record ₹1.25 trillion through this route in the previous fiscal.

“SIP contributions have been the bulwark against FPI selling,” said Jignesh Desai, co-founder, NJ India Invest, the country’s largest SIP distributor. “We will only see SIP flows rising as the returns, courtesy of rupee price averaging, are attracting investors across economic strata.”

SIP is an investment plan offered by mutual funds wherein one could invest a fixed amount in a mutual fund scheme at fixed intervals, say once a month, instead of making a lump-sum investment, according to mutual fund body AMFI. The SIP instalment amount could be as small as ₹500 per month. SIP is similar to a recurring deposit where you deposit a small/fixed amount every month.

Apart from the SIP route, retail clients’ direct investing activity in stocks through brokerages has been robust. Though the market share of individual investors as a percentage of turnover on the NSE cash segment moderated to 37.4% in the first half of the current fiscal from 40.7% in FY22, brokers said retail activity has picked up since November, coinciding with fresh market highs.

“Our margin book has grown in the December quarter, which has seen delivery-based trades rising,” said Rajesh Palviya, VP (technical head), Axis Securities.

Margin book refers to margin funding by brokers where a client gets leverage for buying stocks. Typically, if a client wants, say, ₹100 exposure to stocks but has only ₹25, the broker funds the balance 75% at an annual interest of 12-18% depending on the risk profile of the client. By putting up ₹25, the client gets four times leverage for buying stocks, which has a minimum holding period of three months, which can be rolled over.

“Retail activity has increased in line with improved performance in midcaps and smallcaps in the recent past,” said Gaurav Dua, SVP, head—capital markets strategy, Sharekhan by BNP Paribas.

“To be sure, with market volatility rising, retail investors are booking profits but healthy SIP flows mean that MFs have cash to deploy and this limits the downside, enabling Indian stocks to outperform most other EMs,” said NJ Invest’s Desai.

The increase in direct retail participation of late is supported by a rise in the number of shares traded at 54.47 billion in November this year, up from 48.8 billion in the same month last year. To be sure, cash total investor accounts opened at depositories NSDL and CDSL in the calendar year through November stand at 106.18 billion, up from 80.6 billion in 2021. However, cash market turnover has fallen this year to ₹129.27 billion from ₹172billion in 2021, thanks to an increase in volatility, a fallout from the Ukraine war, at the beginning of the year and more recently, on growing fears of a rate hike induced recession in the US and its global impact.

“The rising volatility means retail investor participation through brokers could decline, but MFs will perforce deploy SIP money to cost average,” added Palviya.

Rupee cost averaging means you buy more units when markets are low and lesser when they are high, bringing down the cost per unit over the long term, resulting in SIP as a popular means of investing over the lumpsum route.

Outstanding SIP accounts have risen to 60.5 million in the present fiscal year (Apr-Nov), up from 52.8 million in FY22.