Retail investors ride the fall safely

While the markets reached record lows last week, led by foreign institutional investors (FIIs), retail investors remained unscathed as they had started booking profits since the Fed rate cut of September 18.

The markets shaved off over seven per cent last week following the regulator's suggestion on October 16 that FIIs should not be allowed to issue or renew offshore derivative instruments linked to futures and options.

Authorities also want to limit the issuance of additional P-notes and have proposed to cap the amount that can be issued by each broker. It proposes to set a limit of 40 per cent of assets under custody for the issuance of new notes. Brokers who exceed the limit will need to pare outstanding notes.

On Wednesday, the markets staged a somewhat 'unbelievable' recovery, according to market participants. While mutual funds, insurance companies and retail investors bought stocks, FIIs were net sellers in that trading session.

Market watchers point out that large broking houses such as JM Financial, Kotak Securities, HDFC Securities, and LIC Mutual Fund were among other major buyers.

"When the market was rising after the Fed rate cut, the retail participation was limited. While we did see some buying by retail investors in the latter half of 18,500, overall their exposure remained light," said Manish Sonthalia, VP - equity, Motilal Oswal Securities.

In fact, retail investors seemed to have become wiser as they bought shares on Thursday morning even as major FIIs having a large share of P-notes with derivative as underlying, unwound positions to square off, bringing the markets down by over 700 points.

"Small investors are more or less unaffected by the last week's big fall as most of them had booked profits at higher levels," said C J George, the managing director of Geojit Financial Services, a leading retail broking house.

The benchmark Sensex shot up 22 per cent since the rate cut from 15,669.12 (on September 18) to 19,051 (October 10), encouraging investors to book profits.

But the afternoon's fall led to some profit booking. "Retail investors who got into the market in the last two weeks have booked profits. The markets look weak now since the momentum has been lost. Even without fresh selling, the lack of buying should keep the markets down, going forward," said Ambareesh Baliga of Karvy Stock Broking.

On Friday, the markets went downhill from the word 'go'. Some market rumours suggest that margin calls were initiated and positions were squared off leading to more selling on Friday.

"High net worth individuals have booked profits in large caps but they were buying in small and mid-caps. Retail investors are not majorly affected since they exited their holdings during the bull run," said Girish Pungalia, assistant vice- president, HNI dealing, Anand Rathi Securities.

Dealers said the fall in stock prices in the wake of subprime crisis during mid-August had left many investors poorer, compared to the current fall.

In fact, data on the Bombay Stock Exchange suggests that retail investors (clients) have bought Rs 1,871.22 crore in the last three trading sessions. Interestingly, mutual funds have been net buyers and, sources say, are not facing redemption pressures this time around.