Retail investor sentiment to shape Indian stock market in coming weeks: Kotak Securities

One of the most notable trends in the Indian stock market has been the strong influx of retail investors, particularly after the Covid-19 pandemic. Their growing presence has served as a buffer against foreign capital outflows. As their influence expands, domestic brokerage firm Kotak Securities believes that their investment behaviour will play a crucial role in shaping domestic market trends in the coming weeks and months.

A research report from Kotak Institutional Equities (Kotak Securities) highlighted that retail investors' returns have been far lower than those of SMID (small and mid-cap) indices. As retail investors have been aggressively investing in these segments directly and indirectly through mutual funds, it will be interesting to see how they react in the coming months to the performance of their investments.

"The investment behaviour of retail investors over the next few weeks/months would be interesting to see. Their price-agnostic investment behaviour (until recently) and continued purchases of stocks directly and indirectly through DIIs (domestic institutional investors) had led to overvaluation in the market for the past 9-12 months and prevented a larger and swifter correction in the market," said Kotak Securities.

Notably, foreign institutional investors (FIIs) have been net sellers of Indian stock since October last year, cumulatively offloading over ₹2.8 lakh crore. At the same time, DIIs have absorbed the FII selloff.

However, FII outflow has been among the key reasons behind the Nifty's fall since October. The index is now down 12.3 per cent from its all-time high of 26,277.35, hit on September 27 last year.

Will new investors stick?

Cheaper internet data, the availability of user-friendly—often free—trading apps and the growing pursuit of alternative income sources have been key catalysts behind the rise in retail investors in India in the last few years.

According to the BSE, the total number of registered investors on the exchange stands slightly over 20.88 crore, showing a 29 per cent year-on-year growth.

Kotak Securities underscored due to high market volatility over the last year, new investors endured significant challenges and it will be interesting to see if they stick.

"We would assume that ‘new’ investors (last 12 months or so) would have ‘low’ risk appetite and understanding of stocks and be nurturing large losses in their portfolios. We note that a decent portion of investors in mutual funds have come into the market in nine months of the current financial year (9MFY25) and a large number of retail investors have become new shareholders in several ‘narrative’ stocks in 9MFY25 when returns have been low or negative," said Kotak.

Kotak said the returns of headline indices may be misleading when determining the returns of retail investors.

"The returns of headline indices (large-cap, mid-cap or small-cap) may be quite misleading to determine the returns and future investment behaviour of retail investors. In fact, they may overstate the actual returns of investors for two reasons—(1) a number of investors have come to the market at higher levels and (2) a lot more money has come ‘into’ the market at higher levels," said Kotak.

Taxes and trading costs would further dent the returns of investors.

"The market could already be on thin ice based on the usual trailing-returns argument for investment by retail investors. 12-month trailing returns have turned weak while 3-month and 6-month returns are negative," Kotak noted.

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