Retail investors invested at high levels, facing bigger losses; their next move is 'critical': Kotak Institutional Equities

12-months the trailing returns have turned weak, while 3-month and 6-month returns are negative.

The behavior of retail investors over the next few weeks will determine the course of the Indian market, wrote Kotak Institutional Equities' Sanjeev Prasad in a note.

According to the analysts at Kotak IE, the price-agnostic behaviour of retail investors until recently and continued purchases of stocks directly and indirectly through mutual funds had led to overvaluation in the market for the past 9-12 months, while also preventing a larger and swifter correction in the market. While FIIs have been aggressively selling, DIIs have been absorbing all the sales.

"In our view, the returns of headline indices may be quite misleading to determine the returns and future investment behavior of retail investors," added the note.

In fact, these returns may overstate the actual returns of investors for two reasons: a number of investors have come to the market at higher levels and a lot more money has come ‘into’ the market at higher levels. Taxes and trading costs would further dent the returns of investors.

The market could already be on thin ice based on the usual trailing-returns argument for investment by retail investors. Over the past 12-months, the trailing returns for investors have turned weak, while 3-month and 6-month returns are negative, added Prasad.

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The ‘new’ investors, who entered the markets over the past 12 months, would have a low 'risk' appetite and understanding, and would also be nurturing large losses, Kotak assumes. The brokerage added that a decent portion of investors in mutual funds have come into the market in 9MFY25, which is when a large number of retail investors become new shareholders in several ‘narrative’ stocks, as well.

As a result, the returns of retail investors have been far lower than returns of SMID indices—retail investors have invested more funds at higher market levels.

On the flip side, the 'old' investors would  a ‘higher’ weighted-average price of acquisition of stocks given the timing of inflows into the market directly or indirectly through domestic equity mutual funds, noted the report.

"They would also have a high weighted-average price of acquisition of stocks pertaining to sectoral/thematic funds given that many of these funds raised money through NFOs at the peak of those sectors or theme," said Kotak Institutional Equities.

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