In April, inflows into systematic investment schemes (SIPs) of mutual funds fell around 3.8 per cent month-on-month. 11,863 crores. SIP is primarily a mode of investment in equity mutual funds. In this sense, a person investing through SIP is buying stocks indirectly on a large scale. In fact, in the seven months from October to April, the total investment made through the SIP route was 79,975 crores.
Interestingly, SIP investments have remained strong despite foreign institutional investors (FIIs) continuing to sell Indian stocks. FIIs sold shares from October to April 1.66 trillion. The sale continued this month as well, with total sales till May 18. 30,394 crores.
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In addition, investors increasingly keep opening demat accounts. From the end of December 2020 to March 2022, the latest data available, the number of demat accounts increased by 80% to 89.7 million. The BSE Sensex reached its all-time high on October 18 at 61,766 points. Between November and March also, the number of demat accounts grew by 22 per cent.
High retail interest in the stock market tells us many things. At first, the average retail investor came in only after the stock markets were bullish. The BSE Sensex closed at a low of 25,981 points on 23 March 2020. As of 31 December 2020, it closed at 47,751 points with a gain of 84%. This rally gave the average retail investor the confidence to invest in stocks by opening demat accounts.
Average monthly inflow in SIP since the end of December 2020 is . has been more than10,000 crores. this was it8,100 crore between January 2020 and December 2020.
This tells us that when it comes to investing, the law of demand doesn’t really work. Simply put, the law of demand states that the lower the price, the higher the demand. What works in the case of investing is the reverse – the higher the price, the higher the demand. This can be gauged from the fact that 35 lakh demat accounts were opened during October 2021, which was more than any other month till that time. This was in the month when the BSE Sensex was at its peak.
Second, the easy money policy introduced by the Reserve Bank of India to help the government borrow at low interest rates prompted people to seek higher returns and, therefore, money found its way into stocks, eventually fueled a bubble where stock prices were completely out. To match the expected income.
Third, retail demand for shares helped loss-making companies to launch and complete their initial public offerings (IPOs). Some IPOs were offers for sale in whole or in part, where promoters redeemed their equity by selling them to the public. Post listing, most of these stocks have turned into massive loss-making offers.
Fourth, retail demand for shares has also helped recent IPOs such as Delhivery. The retail portion of the IPO was under-subscribed by 0.57 times. However, the overall IPO was oversubscribed 1.63 times mainly as the Qualified Institutional Bidder (QIB) category was oversubscribed by 2.66 times. QIBs are basically financial institutions like mutual funds, insurance companies and FIIs. Money invested by mutual funds and insurance companies is ultimately retail money. Simply put, the money coming into the SIP continues to finance the IPO.
Lastly, if retail money doesn’t make its way into the stock market in various ways, then FII sales could still lead to bloodshed. The frequent buying by retail investors has helped prevent this. This is largely in line with developments after 2008, where FIIs buy in years when valuations are low and sell in years when valuations are high. Retail investors do the opposite.