Retail investors have been net sellers in equities in the past four years, as uncertain market prospects prompted them to stay away from stocks or sell these at higher levels.
A recent study by broking firm CLSA shows these investors sold about Rs 15,400 crore in equities in the past four years through all the three routes — direct, mutual funds and insurance products. Though the market is seeing retail flows trickling in, especially through the recent primary market issuances, mainly CARE Ratings’, other analysts said these investors would return only once they saw a renewed bull run.
The aversion to stocks has resulted in the ratio of equity holding as a percentage of total financial assets of the country’s households to dip to seven per cent in September from 10 per cent about four years earlier, CLSA said. The nation’s household assets were worth Rs 104 trillion (Rs 1 trillion equals Rs 1 lakh crore).
“As at November, we estimate retail households have a total exposure of $140 billion to equities, including all the three forms of equity holdings,” said CLSA analysts Mahesh Nandurkar and Bhavesh Pravin Shah in a client note on Wednesday.
These declining holdings have resulted in a rising dominance of foreign institutional investors (FIIs) in the Indian stock market. “Our historical analysis suggests that years in which net FII inflow as a per cent of market cap has fallen below one per cent, the market has dipped 20 per cent on an average,” the analysts said. “Thus, going by the past analysis, a net FII inflow of $10-15 bn will be required in CY13 to drive moderate (close to 10 per cent) returns from the market,” they said.
FIIs have pumped close to $21 bn so far in 2012. CLSA said if the market manages to remain steady, it could trigger retail inflows into equities. In its attempts to attract more retail investors to equities, the government recently introduced the Rajiv Gandhi Equity Savings Scheme (RGESS). The scheme, announced in this year's budget by then finance minister Pranab Mukherjee, would provide a 50 per cent tax deduction on investments up to Rs 50,000 to retail investors whose annual taxable income is below Rs 10 lakh.
“Prior to FY09, retail investors invested five per cent of incremental household savings into equities. Even if retail investors were to go back to half that rate (i.e. 2.5 per cent of incremental annual household savings), we would see $11 bn in inflows or 55 per cent of net FII inflows in CY12,” the report said.