The Indian stock market has been on an impressive rally. This is despite challenges like fears of a US recession and FPI outflows. The strengthening Japanese yen and geopolitical tensions also posed risks. Additionally, increased taxes on short-term gains created further obstacles. Yet, the Nifty and Sensex indices have reached new highs. This resilience highlights the strength of the market.
In August, from the 1st to the 15th, D-Street saw a slight dip. FPIs turned net sellers of Indian equities. They sold shares worth ₹21,201 crore. This caused a temporary decline in Nifty and Sensex. However, the market quickly bounced back in the second half of the month. These investors played a major role in this recovery.
Retail Investors: The Backbone of the Market
Retail investors, often called the “shock absorbers” of the market, have seen remarkable growth. Their participation has increased significantly over the past few years. As of June 30, their share in the stock market reached an all-time high of 7.64%. This is up from 7.52% on March 31, according to PRIME Database. This growth trend has continued, with more and more individuals investing directly in equities or through mutual funds.
The creation of new demat accounts is a clear indicator of this increased participation. In July alone, over 4.55 million new demat accounts were opened, marking the fourth consecutive month in 2024 with over 4 million account creations. This is a significant increase compared to the 3.5 million monthly average seen last year. The National Stock Exchange (NSE) has investors in almost every part of India, with only 30 pin codes—mostly airports—remaining unrepresented.
Looking at the shareholding pattern of companies listed on the NSE, there is a notable increase in the number of retail shareholders. As of the latest data, 762 companies, which represent 43% of those listed on the NSE, have over 50,000 retail shareholders, up from 441 in March 2020. Additionally, 54 firms now have over a million retail shareholders, a nearly five-fold increase in just four years.
Investment Trends: Mid- and Small-Cap Stocks Take the Lead
Retail investors have shown a preference for mid- and small-cap stocks in their investment portfolios. According to NSE’s India Inc’s Ownership Tracker, there has been a noticeable shift in individual investors’ portfolios away from large-cap stocks to mid- and small-cap stocks. In Q1FY25, the top 200 NSE-listed companies by market cap contributed 65.2% to retail investors’ total holdings, down from 75.1% in Q1FY21.
This shift can be attributed to the significant rally in mid- and small-cap companies over the past few years, which has attracted more retail investors to allocate their funds to these stocks. Meanwhile, individual investors’ exposure to Nifty 50 companies has reached a 22-year low as of June 30, indicating a broader diversification of retail investors’ portfolios.
Mutual Funds and IPOs: The New Favourites
There are other ways that retail investor engagement has grown besides direct stock transactions. Additionally, retail mutual fund investments have increased significantly. As of July 2023, retail investors held 61% of the mutual fund industry’s assets, up from 57.5% the previous year, according to data from the Association of Mutual Funds in India (AMFI). Retail investors’ mutual fund portfolios are heavily skewed towards equity-oriented schemes, which make up 86% of their holdings, followed by 9% in debt schemes, 3% in money market schemes, and 2% in ETFs or fund of funds.
The mutual fund industry has seen substantial growth, crossing the ₹60 lakh crore net assets under management (AUM) milestone for the first time in July, with a total of ₹64.9 lakh crore in net AUM.
Initial public offerings (IPOs) have garnered significant attention from retail investors as well. Up until July 11, 2024, retail investors bid for approximately $10.6 billion worth of shares sold in 36 IPOs. The retail portion of these IPOs was oversubscribed 12 times, with 7 IPOs seeing retail portions oversubscribed by more than 50 times. An IPO that caught attention was Exicom Tele-Systems, a company that charges for electric vehicles. After being oversubscribed 120 times, the stock price of the company increased by about 200%. Looking ahead, at least 15 additional IPOs are expected to raise a combined $11 billion in the coming months.
India’s retail investors are reshaping the stock market landscape with their growing presence and active participation. The NSE is now the sixth-largest stock market in the world by market capitalization. This is due to the growing interest in mid- and small-cap firms, mutual funds, and IPOs. Younger investors are increasingly choosing the stock market over traditional assets like real estate. This trend shows a broader shift in investment preferences. Whether it will continue remains uncertain. However, retail investors are currently a key driver of the market’s impressive performance.
