Presently, the total market capitalization of the NSE is close to Rs415 trillion, almost the same as it was during the last week of May 2024. The benchmark indices like Nifty 50, Small Cap 100, Nifty 500, Bank Nifty etc. are also trading almost at the same levels as prevailed during the last week of May 2024.
Decent returns for the last one-year
The benchmark indices may be down 12-16% lower from their September 2024 highs; but they are still yielding a return of 6-9% for the one-year period.
Average asset under management (AUM) of Equity/Growth mutual fund schemes at the end of May 2024 was appx Rs25 trillion. The six-month period from June to December 2024 saw a net inflow of Rs2.7 trillion in these schemes. For the month of December, the average AUM of these schemes was Rs 31 trillion. This implies over 11% net value gain in these schemes during the June-December 2024 period.
For the full year 2024, the value gain in equity MFs is close to 22%. Most equity-oriented funds have yielded over 10% return in the last one-year period. Some sector funds like Pharma and IT Services, have yielded 18-25% return for the past one year. Even the worst performing sector, viz., Banking funds, are yielding ~7% return.
Why is it sounding like a disaster?
Thus, prima facie, household investors (retail) who invested in equities should not be bothered much by the current correction in the stock prices. But looking at the sentiments of these investors, it sounds like a disaster-like situation. Why is that?
In my view, this disappointment (panic, if you prefer it that way) is a function of multiple factors. Some of these factors could be listed as follows:
Misplaced expectations: Many retail investors have accelerated deployment of funds post general election results in early June. They expected massive reforms in the first few months of the new government, as promised in the election manifesto. Many such investors also believed that victory of Mr. Donald Trump in the US presidential election could also be a very good omen for the Indian economy and markets. They are apparently disappointed on both the frontiers. The Modi 3.0 term has been largely uninspiring so far; where Trump 2.0 is sounding ominous so far. This disappointment is likely making retail investors less optimistic about the future prospects of the Indian equities.
Misallocation: While the mutual fund investments, especially through systematic investment (SIP) method, have been much talked about, empirical evidence indicates that retail investors have materially increased allocation to direct equity investment. For the context, the retail ownership of listed Indian equity is ~23%, all time high. The data on shareholding pattern of various companies indicate that most of retail capital allocation has happened to the popular themes like government capex (defense, railways, roads), clean energy (solar, wind, biofuels), and new commerce (modern retail, ecommerce, platforms, fintech, etc.). Several IPOs from these sectors witnessed phenomenal retail interest, even post listing at huge premiums. The correction in the prices of these stocks has been brutal (40-75% from recent highs). The worst part is that this damage could be permanent, as the bubble in valuation is bursting.
Mistiming: Retail investors may have materially increased their allocation to equity post the July 2024 Budget (closer to all time high prices). The average cost of their holding may therefore be much higher; implying low or negative return in the portfolio despite good positive overall returns yielded by benchmark indices and mutual funds.
It is pertinent to note, while the aggregate number of SIPs is encouraging, the internals are bothersome. The number of SIPs discontinued is alarmingly high. Average age of an SIP in about 2.5 years. In December 2024, about 83% of SIPs were discontinued.
Inexperience: Empirical evidence indicates that there has been a material rise in young new investors in the past four year (Post Covid). Since, the stock prices have risen sharply in this period, without witnessing any substantial correction, most of these investors lack experience to weather the market down cycles. The sharp fall in stock prices in a matter of three months, accompanied with negative news flow (specially about incessant FPI selling) might be making these investors excessively jittery.
Prepare for the spring
While the current market conditions appear like the fall season, the spring may not be far away. It is important that the investor do not become disheartened and prepare for the coming spring. In preparation, the following step must be taken:
· Remove the plants with rotten or weak roots.
· Provide nourishment to good plants.
· Prune the existing plants.
· Rope new plants.
· Repair the hedges.
If you do not prepare your garden before the spring sets in, there are good chance of missing the bounty next season would have to offer.
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