Will retail investors be proved smart or fools in the market?
Aug 20, 2014

Impact

Just as a restaurant which offers valuable offers and serves good food & beverages experiences good footfalls from foodies, the Indian equity market too is buzzing of late. The only difference here is, instead of scrumptious food, investors are being offered a platter of expectations. But are valuations mouthwatering, or to simply put, is there much value for money on table?

Well, the 'Modi Wave' has attracted many investors to Indian equities and Foreign Institutional Investors (FIIs) have been front runners. But FII participation seems waning of late, and Indian investors have opened their vaults. As the market has been a scaling a new high, retail investors are evincing interest yet again at the market top, much as they did in the year 2007 before the sub-prime mortgage crisis emerged in January 2008. So, are they too late yet again or is there still much steam left?

Some statitics on retail participation...

Average retail turnover in cash segment of the market has gone up massive 90% since February 2014.
In July 2014, retail participation in cash segment was about 51%
In mutual funds retail investment touched 6-Year high in July 2014

Surging asset base of mutual funds

(Source: AMFI, PersonalFN Research)

As depicted in the graph above, equity mutual funds witnessed redemptions approximately to the tune of Rs 2,000 crore in March. However, from April onwards, mutual funds again found favour with retail investors. In July, retail investors poured in a little over Rs 10,800 crore in equity mutual funds. As market volatility has dropped and surging to new highs, retail investors seem less nervous about possibility of losses now. They are treating such market conditions to be safe enough to make a comeback in the market.

But is investing in Indian equities indeed safe enough now?
PersonalFN is of the view that, from a valuation perspective the Indian the equity market seems quite stretched with the trail P/E sailing over 20. Thus the margin of safety seems to have narrowed. There are some detrimental factors yet in play amid a hope rally, such as:

Fiscal deficit has already run-up 56.1% of the Budgeted Estimates (BE) of Rs 5.31 lakh crore for 2014-15 in the first three months of current fiscal year;
Although the deficiency in monsoon has reduced (to 19% in August 2014 from 43% in June 2014), the fears are not entirely dispelled;
Stickiness in inflation yet remains. CPI inflation for July 2014 has already risen to 7.96% vs. 7.46% in the month prior on account of higher prices of food products;
Industrial growth for June 2014 has shown a see-saw movement yet again;
Geopolitical tensions in Ukraine, Iran and Gaza; and
Global economic headwinds

Thus the market seems vulnerable and retail investors are evincing interest in Indian equities when valuations seem to have run-up ahead of fundamentals.

So, what are the reasons for retail investors to come in at market top?

PersonalFN is of the view that investors easily get carried away by the recommendations of some of self-proclaimed market experts
Retail investors often invest on 'hot tips' without doing adequate analysis on their own before investing
They mainly enter markets when the predominant rally is already over and big investors such as FIIs start exiting
Retail investors try to time the market and often forget to consider own financial goals and circumstances

A prudent approach while investing...
If you are one of the frequent readers of PersonalFN you may not be making the aforesaid mistakes. The PersonalFN has been constantly advising its investors that market valuations appear expensive and buying aggressively at this juncture is not warranted.

If your risk appetite permits and if your asset allocation calls for you to invest in equities, staggering your investment would be a prudent approach while taking exposure to equity. You shouldn't buy aggressively, rather buy selectively. Thoughtlessly investing or speculating can be hazardous to your wealth and health. You see, don't allow history to repeat itself, where in the aftermath of 2008-09 investors burnt their fingers and opted to sit out of the market nearly for 5 years. Whether you are buying stocks or mutual funds you need to choose them carefully. While buying into mutual funds, PersonalFN recommends one to opt for the SIP (Systematic Investment Plan) mode of investing, as it will enable you to mitigate the volatility through rupee-cost averaging and power your portfolio with the benefit of compounding. However, while selecting mutual funds for your portfolio, prefer the diversified equity funds which follow strong investment processes and systems, and invest with a long-term horizon of at least 5 years. At PersonalFN, we believe that your investment discipline and asset allocation would decide your success in investing. So don't be fooled by market exuberance and be a smart investor.