How retail flows have come to chase bull markets

As we can see in the graph above, during the 10 years between 2009 and 2019, every year, individual investors withdrew from the equity market. Net flows were below the zero line. In 2020, at the height of the Covid-19 pandemic that led to lockdown restrictions, businesses closing down and people losing jobs, net inflow was more than Rs 50,000 crore. There was a phase of significant market correction between January and March 23, 2020, followed by a major rally. These events prompted individual participation in the market.

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In 2021, net inflows from individual investors were a whopping Rs 1,42,800 crore — the highest till then. Market sentiments contribute to flows; positive index movements attract fresh money. In 2022, net flows were positive at Rs 88,300 crore. In 2023, net flows from individual investors were barely positive. For 2024, we have data for the first six months, and flows are highly buoyant. It is Rs 91,800 crore and if we multiply it by 2  — the data is between January and June — it comes to Rs 1,83,600 crore — the highest run-rate so far.

Market movement

Market movement and sentiments impact individual flows, though it is reciprocal. Individual flows also influence market sentiments, apart from institutional activity.

As we can see in the chart above, there is a reasonably high degree of correlation between individual net fund flows into the equity market, and return scenario. Sentiments impact each other. For instance, market sentiments impact individual investors and vice-versa.

Conclusion

The market is in a bull phase. The drivers are the fundamental aspects. India being the fastest growing major economy in the world, corporate growth is leading to growth in earnings per share (EPS). There is a cash flow equation as well. New cash is coming in from domestic institutional investors, foreign institutional investors, and individual investors. The cash inflow is through the mutual fund route and also directly into the capital market.

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As we have seen in the data on direct individual flows, it is a reciprocal cycle. It is expected to continue, with the growth of the economy, rise in income levels and increasing awareness aided by digital means. However, there is an inherent risk as well, if and when there is a correction in the market, the chain of positive individual flows may be broken.