Kotak’s Sanjeev Prasad: Retail rush fuels overvaluation, creates golden exit for FPIs

“If you look at the number of domestic mutual fund investors... that used to be about 23 million as of March 2021. That number, as of September 2024, has become about 50 million,” Prasad said. Domestic mutual funds are clocking Rs 40,000 crore of inflows every month.

This surge in retail participation reflects growing optimism among investors, many of whom have seen positive returns over the past few years. According to Prasad, this success has fostered a belief that “you will always make money in the market; you will make large amounts of money in the market; and you will make even larger amounts of money in small- and mid-cap stocks.” He added, however, that “this argument is only valid up to a point.”

While this strategy has worked to some extent in the past, Prasad cautioned against the risks posed by the current environment. “Paying 50, 60, or 70 times earnings for any random company cannot continue indefinitely,” he said, pointing to companies trading at “completely absurd valuations.”

A Potential Turning Point

The structural imbalance in the market—retail investors continuing to buy while FPIs sell—has pushed valuations higher, creating concerns about sustainability.

Prasad outlined three potential scenarios for the market:

Flat Markets: If the market stagnates for several months, retail investors may not see trading returns. Newer investors could experience negative returns, prompting a reassessment of their strategies.

Moderate Correction: A 10–15% correction could bring valuations closer to fair levels. “If the market reaches an equilibrium where foreign investors stop selling and retail investors keep buying, some retail investors will lose money, but at some point, there will be money to be made. So, over the medium- to long-term, investors would recover,” Prasad said.

Prolonged Imbalance: If FPIs persist in selling and retail investors continue to buy, the trend of domestic investors providing exits to foreign investors will continue. “We will be giving an exit to the foreign investors at elevated prices,” he added. Prasad cited the selling by several multinational companies over the past couple of years to encash on higher valuations of their Indian subsidiaries.

“It’s hard to predict how things will pan out,” Prasad said. However, he emphasised that stocks are broadly overvalued, with prices far exceeding their intrinsic value, which diminishes their ability to deliver sustainable returns.