Demats dip, SIP gain

Indian retail investors’ euphoria to directly participate in stock markets is declining as volatility rattles sentiments Image: Dhiraj Singh / Bloomberg Via Getty Images
 
Retail investors’ enthusiasm to bet their money in capital markets lost spark in 2022, after it witnessed an exponential growth in the previous two years. Indian households remained cautious of investing their money in equities, considered to be a risky asset, as factors like geo-political tensions, recessionary pressures, rising inflation and aggressive interest rate hikes by global central banks unsettled investor sentiment.

At a time when the number of retail investors opening demat accounts were declining, inflows through the systematic investment plan (SIP) route into equity mutual funds ballooned to a record high of ₹13,041 crore in October, showing a significant contrast.

“It may be early to derive any trend, but it does indicate that the euphoria around directly investing in stock markets may be fading out and they want to fall back on a fund manager’s strategy to navigate markets, at least during volatile and uncertain times,” says an analyst.

Demat account openings from January to October this year stood at 24 million, taking the total number of such accounts to 104.67 million, Securities and Exchange Board of India (Sebi) data showed. Compare this to a record 30.87 million new demat accounts created in 2021. However, the number of new retail investors flocking to stock markets are still higher than pre-pandemic levels.

New demat accounts more than doubled in 2020 to 10.5 million from a mere 4.5 million the previous year as the super rally in stock markets in 2020 attracted a lot of new investors, a phenomenon seen worldwide post-lockdown. A demat account is opened by an investor with a depository participant to invest in securities such as stocks and bonds. The securities are held in digital format. In India, individuals with shareholdings of up to ₹2 lakh in a listed company are considered retail investors.

The number of new demat accounts created in October was 1.8 million, a sharp fall of 94 percent from 3.5 million in the same month last year. Data showed that new demat account additions started to shrink from April, as the number fell to 2.4 million from a monthly average of 3 million in the January-to-March period.

Prakarsh Gagdani, CEO, 5paisa.com says the volatility in stock markets have impacted direct investing in stocks. “The generation of investors who started during 2020 and only saw the upside for quite some time, witnessed some volatility this year and tasted some losses as well. This has affected sentiments,” he says. However, he adds, this doesn’t mean that the affinity for direct equity is over in any way as there is more awareness and stickiness as well from investors.

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“They are maturing and are behaving as smarter investors than their counterparts of the previous two decades, who left the market completely at the first sign of a downside. Rather than leaving the market in hordes, they have played the diversification and SIP game effectively to actually prolong their stay as investors. They have understood that, while direct equity investment is good during a rally, to benefit from the market in the long-term systematic investment makes sense. But, obviously, in the absence of ample liquidity and euphoria related to the markets, new account openings have slowed down,” Gagdani explains.

He is  optimistic that new investors will continue to open demat accounts in 2023, even though the pace may be slower than in the last two years. “Investors, we believe, will continue the direct equity as well as systematic mutual funds route,” he adds.

Association of Mutual Funds in India (Amfi) data showed a contrast trend of higher inflow of retail money into equity mutual funds. Monthly SIP inflows surged to ₹13,041 crore in October for the first time ever, rising 13.23 percent from ₹11,517 crore in January.

NS Venkatesh, CEO, Amfi remains confident that money through SIP will continue to flow into MF schemes in 2023. “In the last few months, markets reacted to inflationary factors and events like rate hikes. However, small investors have shown consistent faith in mutual fund investments. They see SIP as wealth accumulation and wealth creation over a longer term,” he says.

However, the number of new SIPs registered till October is 21.23 million compared to 24.34 million in full year of 2021.

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“The testimony of maturity among retail investors is the continuous rise of SIPs despite multiple market fall and rise,” says Sachin Jain, analyst, ICICI Securities. “While the domestic financialisation story in well-acknowledged, the maturity and smartness of retail investors in under-appreciated. This maturity among wider retail investors will ensure stable and consistent domestic inflow into the Indian financial sector and equity markets in particular,” he adds.