Retail investors hold key to market direction: Kotak Institutional Equities

The report by KIE reveals a concerning trend: retail investors have consistently underperformed compared to broader market indices, often buying in at higher market levels

The behaviour of retail investors in the coming weeks and months will be crucial in determining the trajectory of the Indian stock market, Kotak Institutional Equities (KIE) said in a note.

 

The report by KIE revealed a concerning trend that retail investors have consistently underperformed than broader market indices, often buying in at higher market levels.

 

The report highlights the significant role retail investors have played in propping up the market, particularly through direct stock purchases and investments in domestic institutional investors (DIIs).

 

It states that understanding the “mind of the retail wallet” will be paramount in predicting the future direction of the market. If retail investors begin to pull back, the market could face a significant correction. This “price-agnostic” buying behaviour has contributed to market overvaluation over the past 9-12 months, preventing a more substantial correction, the brokerage has said.

 

 

KIE’s analysis cautions against relying solely on headline index returns (large-cap, mid-cap, or small-cap) to gauge the actual performance and sentiment of retail investors.

 

The report argues that these indices may paint an overly optimistic picture due to two key factors- investors entering the market at elevated levels and increased fund inflows at these higher levels.

 

Factoring in taxes and trading costs further dampens actual investor returns. Revealing worrying signs, the data stated 12-month trailing returns for retail investors are weakening, while 3-month and 6-month returns have already dipped into negative territory.

 

This discrepancy between reported index performance and actual investor experience could be a crucial indicator of impending shifts in retail investment behaviour.

 

The report segments retail investors into two categories- “new” investors (those who entered the market in the last 12 months) and “old” investors.

 

New investors, often characterised by lower risk appetite and limited market understanding, are likely facing significant losses in their portfolios.

 

Data suggests a substantial portion of mutual fund investors entered the market in the first nine months of FY25, coinciding with low or negative returns for many “narrative” stocks.

 

Older investors, while potentially more experienced, are also facing challenges.

 

KIE estimates that these investors have a higher weighted-average purchase price for their holdings due to the timing of inflows into both direct equities and sectoral/thematic mutual funds launched at market peaks.

 

Notably, fund inflows in 2024 were 25 per cent higher than the cumulative inflows of 2022 and 2023, with sectoral/thematic funds accounting for a significant 40 per cent and 37 per cent of inflows in 2024 and the first half of 2024, respectively.

 

With foreign portfolio investors (FPIs) aggressively selling off Indian equities to the tune of $21 billion between October 2024 and February 2025, the market's resilience hinges on the continued participation of domestic investors, particularly retail investors.

 

The central question now is whether retail investors will continue their support or if the mounting losses will trigger a shift in strategy. 

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Disclosure: Entities controlled by the Kotak family have a significant holding in Business Standard Pvt Ltd