Having burnt their fingers after the market crash of 2008, bearish small investors are in no hurry to return.
‘Sensex at 20,000’ does not mean much to Ajay Patel. He has still not felt the cheer that newspaper headlines and television channels are trying to spread. The reason: His portfolio of mid- and small-cap stocks, which were bought during the late 2007 stock market frenzy, is still languishing. “My portfolio of Rs 1 lakh is worth only Rs 40,000 now. How can I make any fresh commitments?” asks Patel, a telecom executive working in Ahmedabad.
While he has booked losses on some stocks like Ispat Industries, which he sold at Rs 22 (purchase price: Rs 82 in December 2007), there are a number of other shares in his portfolio that continue to bleed.
When the Bombay Stock Exchange (BSE) Sensitive Index, or Sensex, closed at 20,687.88 on October 13 — just around 519 points shy of its all-time high of 21,206.77 on January 10, 2008 — there was a sense of euphoria.
But something is amiss. Thousands of small investors like Patel are in no hurry to return. “Investors have burnt their fingers, so they are being extra cautious this time,” said Aneesh Srivastava, chief investment officer at IDBI Federal Life Insurance. “Had they not seen the Sensex plummet to 8,000-levels, the psychology would have been very different,” he added.
Hit by the worst global financial crisis since the 1930s, the 30-share Sensex plunged to as low as 7,697.39 on October 27, 2008. The sharpness of the fall caught everyone unawares and may were left without an exit route. No wonder the sentiment is yet to improve.
Since April 2010, individual clients – both retail and high net-worth individuals – have sold shares worth around Rs 5,301 crore in the secondary market, taking their total selling in this year to Rs 10,344 crore, data available on the BSE website showed.
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Despite the market rally, the number of dematerialised (demat) accounts — an indicator of investor interest in the stock market — has not grown exponentially. Since April, India’s two depositories, National Securities Depository Ltd (NSDL) and Central Depository Services Ltd (CDSL), have added only about 750,000 demat accounts. The Sensex gained about 15 per cent in this period. The total number of demat accounts, which stands at just 18 million, speaks volumes about the lack of interest in equities in India.
Mutual fund schemes, through which many retail investors participate in the stock market, are facing redemptions at higher stage of the market. Between April-September, investors have pulled out Rs 14,624 crore from equity mutual fund schemes, data from industry body Association of Mutual Funds in India showed.
“Retail investors came in hoards during the last boom, but when the market crashed, they behaved in a very mature way,” said Nimesh Shah, chief executive officer at ICICI Prudential Asset Management. “They were not the first ones to redeem their money. They waited until the markets turned around, which is a good approach,” he added.
Globally, too, the situation is no different. For example, in the US, where 44.5 per cent of households have investments in mutual funds, retail investors have shied away from stocks after the market collapse. Since the beginning of 2008, equity mutual funds have suffered cash outflows of about $245 billion, while bond mutual funds have received inflows of close to $616 billion, USA Today reported last month citing data from the mutual fund industry trade group Investment Company Institute.
| WAITING IN TH WINGS | ||
| Net flows to | ||
| In Rs crore | Equity MFs | Equity market (retail) |
| Apr | -1,333 | -935.53 |
| May | 1,256 | 1163.13 |
| Jun | -1,446 | -1863.37 |
| Jul | -3,400 | -636.52 |
| Aug | -2,890 | -556.50 |
| Sep | -7,011 | -1547.05 |
| Oct* | NA | -925.21 |
| * Up to October 13 Sources: AMFI, BSE Compiled by BS Research Bureau | ||
Back home, even a veteran retail investor like 77-year old Raj Dixit (name changed), who has seen several market cycles, is not comfortable with the current levels. “I am thinking about selling,” said Dixit, who first bought 25 Alfa Laval (India) shares in 1965 for about Rs 200 (it was then called Vulcan Laval). Shares of Alfa Laval closed at Rs 1,411.85 on the BSE on October 13. “Stocks are going up on foreign inflows and not company performance. A correction is bound to take place,” he added.
He has a point. Foreign institutional investors have bought Indian shares worth around $22 billion this year so far, Securities & Exchange Board of India data showed. This is the highest FII flow into equities in a single calendar year ever.
The silver lining is that while profits have been booked by many investors, some are willing to re-enter the market through initial public offerings (IPOs). And, the good performance of some IPOs has been encouraging. For example, issues like Career Point, Midfield Industries and Gujarat Pipavav Port saw an excellent response from retail investors and have performed well on the bourses.
To restore faith among retail investors, markets need to spend some time at these levels and the rally needs to be much more broad-based, analysts say. “Once the market consolidates and becomes less volatile, confidence will improve,” said D K Aggarwal, chairman of Delhi-based SMC Wealth Management Services. ”Quality public sector issues will also help boost retail participation,” he added.
Both Patel and Dixit are looking forward to subscribing to the IPO of Coal India, India’s biggest ever, which will open on October 18.