When markets fall, buy. And when they rise, sell. The retail investor seems to have taken this adage to heart. But while this approach has been rewarding for them in the past four and a half years, experts say it could hurt this time as the current pullback could be sharper and last longer, and warn against what they call “recency bias”.
In September, when markets hit record highs, retail investors net sold ₹8,380.15 crore on NSE’s secondary market. And when markets have come off the highs in October (the Nifty has fallen 5.5% to 24399.4 so far this month), coinciding with rising US bond yields ahead of the US elections and deepening tensions in the Middle East, they have turned net buyers of ₹18,591 crore, NSE data shows.
As recently as 4 June, the day of the national election results, which saw the BJP fall short of forming a government on its own, the Nifty tanked 5.9% from 23,264 in the previous session to 21,884.5. That day, retail investors net purchased shares worth a whopping ₹21,179 crore and the Nifty recouped all its losses three days later to close at a fresh high of 23,290.15.
(To be sure, this data pertains to direct investments in stocks by retail investors, and not through mutual funds.)
“This behaviour points to recency bias,” said Jimeet Modi, founder & CEO of Samco Securities. “In the past four or more years, investors have seen buying a dip pays as market pullbacks or corrections have tended to be shallow or short-lived and markets have hit new highs shortly after the decline.”
Analysts, however, warn that this time, the decline could be longer or sharper with several factors coming together such as macroeconomic uncertainty or a slowdown in earnings growth.
For instance, though food delivery giant Zomato posted a near five-fold surge in Q2 net profit at ₹176 crore, it missed Street expectations of ₹250-270 crore. GST collections in September grew by 6.5% year-on-year, a 40-month low.
“There is a confluence of factors from concerns over earnings and economy slowdown to geopolitical uncertainty and FII outflows, which could extend the decline and make it sharper than seen in the past few years,” said independent market analyst Ambareesh Baliga.
Baliga added that even last month when the Nifty rally culminated into a record high of 26,277.35 on 27 September, retail portfolios were bleeding from the fall in PSUs. Now, with FII selling causing the index to fall more, the loss at portfolio levels would get steeper and lead to an overall decline in market liquidity.
FIIs in the month through 23 October have net sold shares worth a record ₹80,954 crore amid rising geopolitical uncertainty and earnings slowdown, shows NSDL data.
Prakash Kacholia, managing director of Emkay Global Financial Service, feels it’s better for the retail investor to wait and watch the unfolding situation.
“The direct retail investor pumping money into the market now is doing it because of a sense of FOMO (fear of missing out) or because they think a bottom is around the corner,” he said.
Kacholia added that some amount of correction is healthy, even as the long-term bullishness remains intact. “I believe we may be close to making a bottom on the index (Nifty /Sensex). One should focus on stock picking, going forward,” he said.
To be sure, the ‘retail’ investor is defined as individuals, Hindu undivided family (HUF), proprietorship firms, NRIs, partnership firms and limited liability partnerships. NSE is the market leader with a 93% share in the cash market as of end -September.
