Retail investors have matured and they know when to take a u-turn in markets, said Nilesh Shah, managing director of Kotak Mahindra Asset Management. In an exclusive interview with Moneycontrol, he said that retail investors now ask tough questions and they're better read than some fund managers.
In last Samvat, while foreign institutional investors bought equities worth Rs 1.4 lakh crore, domestic investors outpaced that with buying worth Rs 1.75 lakh crore. Local flows have helped act as a floor for markets even as foreign investors have turned net sellers in the last three months.
Shah equated retail investors with Australian cricketer Glenn Maxwell, who scored a double century and single-handedly helped his team win the match against Afghanistan in Cricket World Cup 2023.
"Retail investors right now are like Glenn Maxwell, they're hitting the balls for 4s and 6s," Shah said.
Edited excerpts:
Are sustained inflows from FPIs a necessary condition for reversal of trade? Or can there be circulation within the domestic institutions?
I hope there will be recirculation among domestic investors. Investors should not invest looking at the past, but looking at valuations. Fund flows and sentiments can drive prices for a while, but eventually fundamentals need to back it. We have seen time and again that when stocks run up ahead of fundamentals, eventually they correct.
So, if smallcaps, microcaps and minicaps prices stabilise for a while, then earnings growth can catch up with them. So there is no need for price correction, even time correction is good enough. I hope rebalancing happens within domestic flows and the FPIs have to buy at 20-30 percent discount as compared to what they sold.
Do you see that happening? Because retail frenzy is such that people always go by near-term performance and say 'we have to be here'. How hard is that to correct?
Retail investors right now like Glenn Maxwell, they're hitting the balls for 4s and 6s. There was a time when markets corrected, we would tell our investors to not worry. Now investors are telling us to not worry and giving us more money to buy out FPIs. The maturity of retail investors is truly unbelievable. We now have to go fully prepared, investors ask us really tough questions. They ask questions about how AI is changing the world.
Many of the investors are better read than us, so no one can fool them. There are some who are novice, but by and large, the markets have matured. Investors know when to take a U-turn, when to do rebalancing.
Also Read: Investors think equities riskless but money flow will change once they realise otherwise: S Naren
Will the trend of money flowing only into smallcaps reverse this year?
Money will continue to come in smallcaps, but more money will move towards larger cap stocks.
Is there a problem in investing in smallcaps?
There are a couple of risks. One is valuation. We believe certain parts in smallcaps have become expensive. However there is still some opportunity. The second risk is liquidity. There is a higher impact cost in smallcaps and entry and exit will undoubtedly create an impact cost.
The third risk is governance. We cannot say that all smallcap companies have good governance system. In largecaps, chances of going wrong are rare. But in smallcaps and midcaps you could go wrong. We really made a terrible mistake as an industry by investing into many fly-by-night operators in 2000. We corrected it by 2008. Now in 2024, we should not go into the new year like 2000. Every company in which we invest, should be a real business with real governance.
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