The small investor learns the art of booking profits

So far this fiscal (April-December 2023), direct retail investors have net sold shares worth ₹1.68 trillion, coinciding with a roaring rally in mid-, small- and large-cap stocks. Their selling comes after being net buyers of a combined ₹1.09 trillion in April-December 2021. In the same period (FY24), the Nifty Midcap 150 Index rallied 50% to 17,077.05, the Nifty Smallcap 250 by 60% to 14,041.30 and the Nifty returned 25% to touch 21,731.4 on 31 December 2023.

While retail investors net sold shares during this period, foreign portfolio investors (FPIs) have net purchased ₹1.97 trillion and domestic institutional investors (DIIs), including mutual funds, banks and insurance companies, net purchased ₹1.01 trillion, according to exchange data.

“The behaviour of the direct retail investor has undergone a sea change,” said B. Gopkumar, MD & CEO, Axis AMC. “Earlier, they would hop on to the small- and mid-cap bandwagon at times of euphoria, sell at a loss and stay away from investing. Now, they’re doing just the opposite. They’ve used the rally to churn portfolios, which is proven by the near doubling of the margin trading facility book to ₹60,000 crore over just the past eight-nine months.”

The margin trading book is a facility offered by brokers wherein a client can invest in stocks without making full upfront payment. The client has to pay interest on the borrowed amount to the broker for as long as he holds the shares, which are pledged to the depositories. The rise in the size of the overall broker book, cited by Gopkumar, shows that clients have used the facility to churn their portfolios frequently—that is, buy and sell when prices rise, again buy, sell, etc.

As recently as the past decade, retail investors tended to buy at elevated levels and exit at huge losses, said independent market analyst Ambareesh Baliga. “Retail may be divided into those who entered the market post-covid, who buy when shares trade lower and sell when they shoot up quickly, and those who are legacy holders of large-cap stocks that have rallied in the past year, offering them an exit,” Baliga said. “Surely, retail has matured into a smarter lot, like the FPIs who tend to buy low and sell high.”

The bitter experience of retail in the past led them to stay away from investing directly for 11 long years through 2019-20, NSE data shows. For instance, figures released by the exchange showed that they net sold shares worth ₹1.2 lakh crore during FY15-19.

The jump in retail participation is also borne by the jump in demat accounts from 41 million in 2019-20 to 144 million in 2023-24 (through January) according to the depository data.

Investor behaviour towards the small- and mid-caps will be predicated on how the earnings pan out in the coming quarters to justify the high valuations, according to Gaurang Shah, senior vice-president, Geojit Financial Services. He said in the December quarter, in certain sectors, small-cap and mid-cap earnings have disappointed.

However, in contrast to the trend seen in cash activity, retail participation in the F&O (futures and options) segment as a share of gross turnover hit a five-year low of 25.7%, according to NSE data.