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Guest Column

Published on: Sept. 20, 2020, 11:46 p.m.
How retail participation has increased during the Covid-19 pandemic
  • The rise continues

By Ajay Menon. The author is MD & CEO, B&D, Motilal Oswal Financial Services

Indian markets have gone through a volatile journey since the onset of the Covid-19 pandemic in March 2020. While it initially witnessed a sharp correction at the beginning due to the lockdowns, it managed to recover a majority of the fall. In such a volatile environment, investors tend to get worried about managing risk and protecting their wealth. However, this time, retail investors did not panic. In fact, their participation increased despite the economic uncertainty.

There are a couple of factors driving retail investors to the stockmarket.

Millennials are recognising the importance of savings and are attracted to the equity market.

Increasing digitalisation is making it easier to open demat/trading accounts and start investing from the comfort of one’s home. Further, low fee trading platforms are also attracting huge participation, especially from day traders.

Moreover, millennials have a huge risk appetite as compared to the previous generation. Also, due to improving investor education and growing awareness, an increasing number of retail investors from tier-2 and tier-3 cities have been actively participating in equities.

In the current scenario, where interest rates are going down, many people are looking at equities as an alternative investment.

All these factors have increased retail participation in the stock market to one of the highest levels ever. CDSL added 26 lakh accounts between March and June 2020. This is far higher than the 8.4 lakh accounts that were opened in the first two months of 2020. Exchange data also shows there is a sharp jump in the market share of non-institutional investors (NII) in the cash segment; this is the highest since August 2009. The share of NIIs jumped sharply over the last four months to 72 per cent from around 50 per cent in FY20.

As retail participation rose, one more change was visible. Within online trading, stock trading via mobile phones rose more than internet-based trading during the Covid-19 lockdown. While mobile trading is done purely by retail investors, internet-based trading is either through broker terminals on behalf of retail clients or investors directly logging in from personal computers. Mobile trading turnover in the cash markets jumped from around 9 per cent to 23 per cent (from February to June 2020) while Internet trading saw an approximately 4 per cent rise to 13 per cent over the same period.

At Motilal Oswal, we have seen our mobile application downloads double in the last couple of weeks, along with a noticeable increase of more than 50 per cent in our digital trade. On many occasions, our platform handles more than one million trades per day. Our average delivery volume per day has grown more than 50 per cent in the past two months.

Retail investors seem to be smarter this time round as they continue to sell equities, busting the myth of them buying high and selling equities at lower levels. Q2FY21 earnings performance will be closely watched to understand visibility in corporate earnings and if the momentum continues, the market may witness new highs; otherwise a sharp correction going ahead may be expected. This is why retail investors should remain cautious, especially ‘fresh’ investors. Short term investors should trade cautiously and maintain stock specific action as the current valuations at ~21x P/E may cap the upside.

Long term investors with good quality stocks should hold on to their portfolios. The best strategy would be to accumulate good fundamental and quality stocks gradually over the next few weeks and months. We also recommend maintaining adequate liquidity at individual portfolio levels, and to invest in the markets in a staggered, systematic way, with enough diversification across sectors. We suggest a defensive approach to portfolio construction with a preference for telecom, IT, speciality chemicals, healthcare and select banking, while one can look at the rural consumer space as a recovery play. Investors can benefit from these themes which are playing out well currently and build a portfolio around them for two-three years to create wealth.

The increase in equity participation augurs well in India, which has a young demography and low capital market penetration. Even if the WFH is lifted, we believe that the trend of increased retail participation should continue unless the market gets too unpredictable. Thus, while several investors have been quick to enter the markets amid the run-up, it would be interesting to see how these investors behave if market volatility intensifies again.

Direct equity investment for retail investors involves a lot of risk, as the majority of them lack the necessary proficiency. Thus, for a better investment journey, it’s advisable they invest through professionals or via the mutual fund route.

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