Small investors are savvier; look what they did with small-cap stocks

As a category, retail investors’ share in these stocks declined between the March and December quarters, a period when many small-cap stocks generated sky-high returns. In the past, many retail investors used to burn their fingers, buying up overheated shares and selling lower.

For instance, stocks like BSE, Birlasoft, Zensar Tech, Sonata Software, and RBL Bank, which rose between 23% and 415% in the nine months through December, saw the share of the retail category falling 4.26-10.8%. The retail category comprises investors who buy shares up to ₹2 lakh.

In all, out of the 250 stocks comprising the Nifty Smallcap index, retail investors cut their stakes in 139, while increasing them in 108. Against this, mutual funds increased their stakes in 162 out of 250 stocks, while cutting them in only 86.

Valuations in some of these companies have gone through the roof. For instance, in BSE, which saw retail stake falling to 34.08% at the end of December from 44.88% at the end of March, price to earnings multiple jumped to 39.54 times from 26.62 times. In software firm Birlasoft, retail stake fell to 13.66% from 19.84% as the P/E multiple surged to 36.32 from 22.21 times and in Zensar, the stake declined to 12.9% from 17.58% amid the PE rising to 26.99 times from 19.09 times.

“Retail has been taking more informed decisions, thanks to them being better equipped, educated and more aware of the risks inherent in small and midcap stocks,” said Kishor Kansagra, chairman of BSE Brokers Forum, comprising over 700 brokers across India. “This is a change from the past when retail, acting largely on hearsay, entered at the peak and exited at a loss and stayed away from the markets, thereafter.”

In the calendar year through December 2018, when BSE Smallcap 250 plunged 24.4% through 2220.6, retail investors on that exchange net purchased shares ₹444.8 crore, showing their entry at high levels.

Interestingly, retail investors on both NSE and BSE have net sold shares worth ₹684 billion in the fiscal year through December, after having net purchased ₹11 billion in FY23 and ₹1.08 trillion in FY22.

In the nine months through December 2023, the Nifty Smallcap 250 rose by 60% to 14,041.29 points. In FY23 and FY22 , when retail net invested, the small cap index fell by 8.65% to 8,787.9 and rose by 33.2% to 9,529.9 points respectively. The relatively huge sales in the current fiscal follow the net buying particularly in FY22. From FY22 end to FY24 (Apr-December), the small cap index has risen 47.33%, which coincides with the retail selling this year.

“Retail has become much more mature than earlier and made more money in the past couple of years,” said Sudip Bandyopadhyay, non -executive director, Inditrade. “In the last three years, after every fall, markets have tended to rise, during which they’ve bought the dip and sold the rise.”

However, there are some who believe that barring a few, retail investors still suffer from a herd mentality.

“I don’t think the mindset has changed much from the past,” said Uttam Bagri, promoter director, BCB group. “Many of them still invest on tips and hearsay rather than through their own research.”