Article

Why are retail investors rushing to invest in a falling market?

16 Apr 2020

In the last 2 months, the stock indices corrected by as much as 33% including two lower circuits of 10%. However, in this entire melee, retail investors have not lost their appetite for buying stocks at lower levels. While it is hard to quantify, one metrics that captures sustained retail interest even in volatile markets is the SIP flows.

monthly net sip
Data Source: AMFI

Market volatility or otherwise, the SIP flows have been on a consistent ascendant all the way to Feb-2020. SIP flows typically represent retail flows into equity funds. That is the predominant representation. SIP flows give investors the benefit of rupee cost averaging and for someone who has been running the SIP over the last five years, the losses would be minimal.

Long term approach has finally taken roots

Between 2014 and 2019, the total AUM of Indian mutual funds grew from Rs.8,00,000 crore to Rs.28,00,000 crore. That was driven by a massive expansion of retail money. A large part of the retail money has come through SIPs and the presence of over 3.2 crore SIP accounts is testimony that retail investors have adopted a systematic and long term approach to investing. Also, there is a greater tendency to prefer the mutual funds route over the direct equities route as it gives them the comfort of diversification. However, the retail investor of 2020 is not led by a Pied Piper like in 1992 or by penny stocks like in 2005 or by lofty stories like technology and realty. With long term investments systematic, there is the appetite to nibble at quality stocks at lower levels. That is what explains the retail appetite for equities even after such a sharp fall.

Is the optimism to buy falling stocks justified?

If you do a quick back-test, there are two basic takeaways that emerge. Firstly, as long as you don’t try to catch falling knives you are safe in buying falling stocks. That has two implications. Firstly, don’t buy the sectors that drove crazy valuations. Secondly, buy stocks that have sustained growth in the past. Armed with these two principles, let us look at how markets have reacted after every sharp correction in the last 30 years.

falling stocks table
Data Source: BSE

The above table refers to how the Sensex has reacted after every major correction in the last 30 years.

Clearly, after every strong correction, there has been a rebound that has taken the markets well beyond the previous highs. Such bounces have lasted from a few months to as long as 4 years but a diversified index like the Sensex always gets the better of volatility. The argument appears to be that if you time the purchase of quality stocks at these lows, then your returns could be impressive and also quick. For example, if an investor was willing to buy HDFC Bank at Rs.1300, there is no reason not to buy the stock at Rs.800.

That is exactly what retail investors are trying to do. Traditionally, retail investors have tended to buy at highs and panic and sell at low levels. That was largely due to leveraged positions. With exposure to non-leveraged products like equities and mutual funds, that risk is substantially lower.

Financial planning approach of millennials

One way the correction of 2020 is different from the previous major corrections like 2000 or 2008 is the presence of a larger millennial population active in equities; either directly or indirectly. Most millennials have adopted a more technology savvy DIY approach to financial planning. Allocation to different asset classes has ensured that they are not entirely exposed to equities.They can, therefore, afford to take a calculated wager on equities.

max min returns

Source: BSE

What the above chart shows is that as investors hold a diversified portfolio for more than 5 years, the probability of negative returns is very small. Hence nibbling at equities that have been beaten down is a luxury that they can afford. Anyways, as long as they are diversified and invested for the long haul, there risk is very low.

Don’t forget the gold factor

The World Gold Council has estimated gold with Indian households at 22,000 tonnes. That is worth $1.20 trillion at current prices. With gold prices up by over 30% in the last one year, Indian households have seen $300 billion of idle wealth being created. While just about 6% of Indian households are exposed to equity, nearly 40% of the households are exposed to gold. It is this wealth effect that is now being monetized and leveraged. Equities at current valuations are just giving them the right opportunity! The question is; why not?

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Why are retail investors rushing to invest in a falling market?

16 Apr 2020

In the last 2 months, the stock indices corrected by as much as 33% including two lower circuits of 10%. However, in this entire melee, retail investors have not lost their appetite for buying stocks at lower levels. While it is hard to quantify, one metrics that captures sustained retail interest even in volatile markets is the SIP flows.

monthly net sip
Data Source: AMFI

Market volatility or otherwise, the SIP flows have been on a consistent ascendant all the way to Feb-2020. SIP flows typically represent retail flows into equity funds. That is the predominant representation. SIP flows give investors the benefit of rupee cost averaging and for someone who has been running the SIP over the last five years, the losses would be minimal.

Long term approach has finally taken roots

Between 2014 and 2019, the total AUM of Indian mutual funds grew from Rs.8,00,000 crore to Rs.28,00,000 crore. That was driven by a massive expansion of retail money. A large part of the retail money has come through SIPs and the presence of over 3.2 crore SIP accounts is testimony that retail investors have adopted a systematic and long term approach to investing. Also, there is a greater tendency to prefer the mutual funds route over the direct equities route as it gives them the comfort of diversification. However, the retail investor of 2020 is not led by a Pied Piper like in 1992 or by penny stocks like in 2005 or by lofty stories like technology and realty. With long term investments systematic, there is the appetite to nibble at quality stocks at lower levels. That is what explains the retail appetite for equities even after such a sharp fall.

Is the optimism to buy falling stocks justified?

If you do a quick back-test, there are two basic takeaways that emerge. Firstly, as long as you don’t try to catch falling knives you are safe in buying falling stocks. That has two implications. Firstly, don’t buy the sectors that drove crazy valuations. Secondly, buy stocks that have sustained growth in the past. Armed with these two principles, let us look at how markets have reacted after every sharp correction in the last 30 years.

falling stocks table
Data Source: BSE

The above table refers to how the Sensex has reacted after every major correction in the last 30 years.

Clearly, after every strong correction, there has been a rebound that has taken the markets well beyond the previous highs. Such bounces have lasted from a few months to as long as 4 years but a diversified index like the Sensex always gets the better of volatility. The argument appears to be that if you time the purchase of quality stocks at these lows, then your returns could be impressive and also quick. For example, if an investor was willing to buy HDFC Bank at Rs.1300, there is no reason not to buy the stock at Rs.800.

That is exactly what retail investors are trying to do. Traditionally, retail investors have tended to buy at highs and panic and sell at low levels. That was largely due to leveraged positions. With exposure to non-leveraged products like equities and mutual funds, that risk is substantially lower.

Financial planning approach of millennials

One way the correction of 2020 is different from the previous major corrections like 2000 or 2008 is the presence of a larger millennial population active in equities; either directly or indirectly. Most millennials have adopted a more technology savvy DIY approach to financial planning. Allocation to different asset classes has ensured that they are not entirely exposed to equities.They can, therefore, afford to take a calculated wager on equities.

max min returns

Source: BSE

What the above chart shows is that as investors hold a diversified portfolio for more than 5 years, the probability of negative returns is very small. Hence nibbling at equities that have been beaten down is a luxury that they can afford. Anyways, as long as they are diversified and invested for the long haul, there risk is very low.

Don’t forget the gold factor

The World Gold Council has estimated gold with Indian households at 22,000 tonnes. That is worth $1.20 trillion at current prices. With gold prices up by over 30% in the last one year, Indian households have seen $300 billion of idle wealth being created. While just about 6% of Indian households are exposed to equity, nearly 40% of the households are exposed to gold. It is this wealth effect that is now being monetized and leveraged. Equities at current valuations are just giving them the right opportunity! The question is; why not?