Diverging trade

Appeal of direct equity investment is waning

Rising interest rates and a lacklustre stock market may have induced some behavioural changes in retail investors. Inflows into equity mutual funds remain strong, but individuals appear to have pulled back on direct exposures to the stock market. Data also indicates that some investors have moved investments from equity into fixed-income instruments, while others have moved into the highly speculative derivatives segment. Going by the National Stock Exchange (NSE) data, individual investor participation dropped to a multi-year low in January, and the number of active traders on the NSE also declined for a seventh month in a row. Price declines in the small-cap categories, which are the favourites of retail investors, signalled lower demand for these stocks, which is usually a strong indication of waning retail interest. Although the Nifty50 itself has gained about 3.5 per cent in the last 12 months, the Nifty Smallcap 100 index has declined 10 per cent during the same period.

The NSE estimates that individuals, including high net-worth individuals, invested Rs 22,829 crore in January, which was the lowest monthly investment level since March 2020, and much less than the record inflows of Rs 58,409 crore in February 2021. The share of retail investors in total cash market investments has dipped to 44 per cent from a peak of 66 per cent. The number of active accounts on the NSE amounted to 34 million in January, down 3 per cent from December 2022, making it a seventh consecutive monthly decline. The peak in terms of active accounts was 38 million in June 2022. The dip in initial public offering (IPO) activity is another reason for waning direct retail participation. Securities brokers also claim that the rate of demat account openings, which is correlated to new retail investors entering the market, has also slowed down. A tighter regulatory framework with stringent margin requirements and the move to T+1 settlements may have also dissuaded under-capitalised retail trading in the cash segment.
 

However, the mutual funds data indicates that there is still strong retail participation through this route. January saw net inflows of around Rs 17,000 crore into the equity mutual and hybrid funds segments, which are both dominated by retail investors. This is more than in the whole of Q3 (October-December 2022), when total inflows to these two segments amounted to only Rs 11,910 crore. Systematic investment plan (SIP) contributions in the first 10 months (April-January) of financial year 2022-23 (FY23) amounted to Rs 1.28 trillion, which is more than the SIP inflows of Rs 1.25 trillion in all of FY22. Since SIPs are almost exclusively deployed by retail investors, this indicates individuals are still investing with the same degree of enthusiasm. While a tighter monetary regime, shorter settlement, and stringent margin requirements may have led to lower retail investment in the cash segment, there are indications that some traders have moved to the derivatives segment, as the average daily futures and options volumes have more than doubled in the last 12 months.

Taken together, it seems that individuals with conservative risk appetites have settled into fund-based investments while raising their exposure to fixed deposits. At the same time, individual day-traders with high risk appetites have moved to the derivatives segment, where higher leverage is available for the same margins.