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 context, an investor investing through SIP is buying stocks indirectly on a large scale. In fact, in the seven-month period from October 2021 to April 2022, the total investment made through the SIP route stood at Rs 79,975 crore.
Interestingly, SIP investments have remained strong, while Foreign Institutional Investors (FIIs) are selling in Indian equities. FIIs sold shares worth Rs 1.66 lakh crore from October 2021 to April 2022. The sale continued this month as well, with total sales till May 18. 30,394 crores.
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. In fact, from November 2021 to March 2022, the number of demat accounts has increased by 22%.
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 has given the average retail investor the necessary confidence to invest in stocks by opening demat accounts.
In fact, the average monthly inflow in SIPs since the end of December 2020 is . has been more than 10,000 crores. Between January 2020 and December 2020, it was approx. 8,100 crores.
This tells us that the law of demand doesn’t really work when it comes to investments. 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.
Secondly, 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 hence, money found its way into stocks, eventually fueled a bubble where stock prices were completely out. of sync with respect to expected earnings.
Third, retail demand for shares helped loss-making companies to launch their initial public offerings (IPOs). Some of these 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 the recent IPOs like Delhivery. The retail portion of the IPO was under-subscribed by 0.57 times. But the overall IPO was oversubscribed 1.63 times mainly because the Qualified Institutional Bidder (QIB) category was oversubscribed 2.66 times. QIBs are basically financial institutions like mutual funds, insurance companies, FIIs etc. 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.
And lastly, if retail money had not continued to enter the stock market in various ways, FII sales would have been a cause of bloodshed by now. The frequent buying by retail investors has helped prevent this. Of course, all 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.