SIPs stop, demat accounts slump: Are retail investors running scared?

“Another 5% or more correction in the mid- and small-cap index will trigger redemptions (from equity schemes) in the next couple of months,” said Viraj Gandhi, chief executive of Samco Mutual Fund.

Calm before a storm

Gandhi explained that 28-month-old systematic investment plans (SIPs) are currently experiencing negative returns. This means investors who entered the market in the last couple of years, particularly in the mid- and small-cap segments, are bearing most of the brunt.

“Once 36- and 48-month SIPs turn negative, that’s when redemptions will start and a bottom will form. Hence, investor sentiment might be dented right now. But it is not punctured yet,” he added.

AMint analysis of the latest Association of Mutual Fund Industry (AMFI) data showed that the redemption to net inflows ratio for equity schemes has remained below 1 since September. This indicates that redemption pressure on mutual funds has remained low until February as most investors are avoiding booking losses, according to experts.

“No one is rushing to buy the dips either as sentiment is downbeat in the mid- and small-cap segment—where most of their (retail investor) money is,” said Ajit Mishra, senior vice president of research at Religare Broking.

This also explains why broader retail investor participation in the market has waned since the start of this year. SIP stoppages outpaced fresh SIP openings for the second straight month in February, rising to 122% from 109% in January, the latest Amfi data showed.

In fact, retail investors have been retreating since September, when the market fell from its peak. The number of new demat accounts opened in February hit a 21-month low at 2.3 million, indicating retail investors are turning cautious about investing in stocks as bearish sentiments reign supreme in the market. This phenomenon is also evident in the 21% fall in new SIPs registered in February compared to January.

From optimism to unease

Retail investors are taking a breather, waiting for the market volatility to subside, noted Mishra from Religare. But this wait might be longer than most of them are prepared for, he warned.

The newcomers are navigating a difficult path. “Most investors who have just joined the market will lose patience because from here on, the equity market is going to be the toughest place to make money,” noted Gandhi from Samco Mutual Fund.

It appears that these retail investors have taken cues, as they are reducing their exposure to equity investments following the historic low faced by Indian equities in February when the Nifty 50 closed a near-unprecedented streak of monthly losses.

While monthly net inflows into equities in the National Stock Exchange’s secondary market fell 27% in February, retail investors have turned net sellers in March. Their equity assets under custody have also fallen 13% in the last two months, indicating both market losses and sales.

Faith versus fear

Gandhi said the domestic equity market is about to enter a prolonged phase of consolidation following the current downturn. This will test the mettle of most investors who have been used to only shallow phases of corrections post-covid.

Even in these testing times, experts remain optimistic about new investors’ commitment to equities, citing greater knowledge and risk tolerance. Nevertheless, some numbers suggest retail investors are currently exercising caution, though not alarmingly.

Moreover, as retail investors trim their exposures to equities, experts say they can still make decent returns by cherry-picking their investments.

“Large caps are offering the best risk-adjusted returns along with domestic facing sectors like travel and tourism. Select pharma, real estate and large NBFCs (non-banking financial companies) are also looking quite attractive,” Gandhi said.