In April, inflow into systematic investment plans (SIPs) of mutual funds fell by around 3.8% month on month to ₹11,863 crores. A SIP is a method of investing primarily in mutual funds. In this sense, a person who invests through the SIP route is largely buying shares indirectly. In fact, in the seven months from October to April, total investments made through the SIP channel amounted to ₹79,975 crores.
Interestingly, SIP investments remain strong even as Foreign Institutional Investors (FIIs) continue to sell Indian stocks. From October to April, FIIs sold shares worth ₹1.66 trillion. This sale also continued this month, with net sales through May 18 amounting to ₹30,394 crores.
Beyond that, investors continue to open demat accounts at a rapid pace. From the end of December 2020 to March 2022, the latest data available, the number of demat accounts increased by 80% to reach 89.7 million. The BSE Sensex reached its all-time high on October 18 at 61,766 points. Even from November to March, the number of demat accounts increased by 22%.
Retailers’ high interest in the stock market tells us several things. First, the average retail investor only entered equity markets after a significant rally. The BSE Sensex closed at a low of 25,981 points on March 23, 2020. As of December 31, 2020, it had rebounded 84% to close at 47,751 points. This rally gave the average retail investor the confidence to invest in stocks by opening dematerialized accounts.
The average monthly influx into SIPs since the end of December 2020 has been greater than₹10,000 crore. It was to₹8,100 crores 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. When investing, what works is the reverse: the higher the price, the higher the demand. This can be measured by the fact that 3.5 million demat accounts were opened in October 2021, which was more than any other month until then. This was during the month that the BSE Sensex peaked.
Second, the easy money policy launched by the Reserve Bank of India to help the government borrow at low interest rates caused people to seek higher returns and as a result money ended up in stocks, eventually fueling a bubble where stock prices were totally out of sync with expected earnings.
Third, retail demand for stocks has helped loss-making companies launch and complete initial public offerings (IPOs). Some IPOs were fully or partially sale offerings, where sponsors cashed in their capital by selling it to the public. After listing, most of these stocks turned into massive loss-making proposals.
Fourth, retail demand for stocks has helped even a recent IPO such as Delhivery. The retail portion of the IPO was 0.57x undersubscribed. However, 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 such as mutual funds, insurance companies and FIIs. Money invested by mutual funds and insurance companies is ultimately retail money. Simply put, the money going into SIPs continues to fund IPOs.
Finally, if retail money had not continued to enter the stock market in various ways, the sale of FII would have already led to a bloodbath. Continued buying by retail investors helped prevent this. This largely mirrors what happened after 2008, where FIIs buy in years when valuations are low and sell in years when valuations are high. Retail investors do the opposite.