Individual investors are the likely reason behind the latest market uptick. The benchmark Nifty 50 index has rallied 10 per cent since June 15. During this period, foreign portfolio investors (FPIs)—considered to be the main drivers for the market—have sold shares worth nearly Rs 5,000 crore. The buying by mutual funds—which normally offset the selling by FPIs—too, has been muted at less than Rs 2,000 crore for the period under consideration. The sharp gains in many stocks without strong institutional buying has surprised many on the Street. This, coupled with a dip in institutional share in turnover has led many to believe that it is individual investors—both small as well as high-networth individuals (HNIs)—who are spurring the markets.
"Data seems to suggest retail investors are driving the markets. This can be seen in the sharp increase in the new investor accounts opened, the rising share of non-institutional participation, and activity via internet and mobile-based trading. This is not just in India, but also seems to be the case in countries such as China, Korea, and elsewhere,” said Abhiram Eleswarapu, head of India Equities, BNP Paribas. "Institutional investors, on the other hand, seem unanimous in their view that the markets may have overheated somewhat," Eleswarapu added.
From the coronavirus lows on March 23, the Nifty has rebounded 42 per cent.
Experts said the fear of missing out (FOMO) is another factor that is driving retail participation.
"Once retail investors are convinced that this move is not going to end soon and is going to get broader in terms of participation, they jump in. Non-institutional and other retail investors, directly or through portfolio management schemes (PMSes), have become active.' said Deepak Jasani, head of retail research, HDFC Securities.
Analysts said that first-time investors and millennials have become active in the market post lockdown. Many are investing without much fundamental basis, they add.
"A lot of people are sitting at home and have plenty of time to trade. Most of these retail investors do not look at any valuation parameter or other fundamentals they see the price and take a position," said G Chokkanlingam, founder, Equinomics.
While it has been a one-way Street for the market since March. Experts say it remains to be seen how the new crop of investors behave once the tide turns.
"This (heightened retail participation) usually happens during the fag-end of the rally,” said Jasani. " We do not have enough depth to absorb FPIs selling of $5-10 billion," added Chokkalingam.
Whether this rally will continue depends on what shock the markets will face in the next two-three weeks, said analysts. " If there is a sharp reversal in the next couple of weeks, the retail investors will be saddled with all the stocks at high valuations. They may step back and choose not to come back in a hurry," said Jasani.
Analysts cautioned that retail investors should refrain from taking leveraged positions and putting money in the penny and small-cap stocks without looking at fundamentals, and carefully select stocks in a staggered manner if they are underinvested in stocks.
"If they are fully invested in equities, it is a good time to take a hard look at your portfolio and weed out stocks which have risen beyond their intrinsic value and raise some cash," Jasani added.
Amar Ambani, Senior President & Institutional Research Head, YES Securities observed, “FPIs appear to be selling in cash segment are buying heavily in index futures, thereby triggering a lot of short covering in the market.”