When investing becomes a (risky) hedge to small business slowdown

“During the initial months of the lockdown, I tried to keep myself engaged in different activities. Later on I started helping my daughter with her pet clothing online business which was booming and I started taking care of the production part. In March this year while speaking to my family friends I got to know about how they started trading in the stock market during the lockdown and are getting good results out of it. I was always interested in trading but had never thought of doing it in a full-fledged manner,” recalls Thakur, founder of Astro Playhouse. She then decided to open a trading and demat account with Zerodha, India’s largest stock broker. After taking suggestions and help from friends, Thakur played safe and invested in trusted companies like Tata Power, Infosys, Tata Motors, Reliance, State Bank of India and so on. To avoid losses and risk, she took the route of cash trading and invested in long-term stocks.

Starting off with an investment of Rs 1 lakh from her savings, she gradually kept adding Rs 50,000. After investing Rs 6 lakh, Thakur made a profit of Rs 1 lakh in two months. “From the last two weeks, I have been making a loss of Rs 20,000 daily, in fact earlier this week I lost Rs 40,000. So basically I lost all my profit but just two days back I recovered Rs 30,000. So now I’m Rs 8,000 down on my total investment. I’m confident to recover the same. From mid-July till now the markets have been very volatile but since I have invested in all top companies with zero debt, I’m not worried about losses.” Till date she has invested over Rs 15 lakh in the stock market.

As a first-time investor, Thakur, who started with day trading and has now gradually got into long-term investing, is also planning to join an online course so that she is familiar with the jargon and concepts. “I learn new things every day about how the market functions. It has become some sort of an addiction where I start missing it on weekends when the markets are closed. After a couple of months when my day school will reopen, I won’t be able to follow the market on a daily basis and so I’ve started building a portfolio for the long term,” she says.

With job losses and a slump in businesses, many retail investors like Thakur have been looking to the stock market, taking advantage of the market boom, learning the tricks of the trade as they go along and not just investing for the future but also as a way to keep income coming in to tide over the slump.

Even as market indices have been scaling new peaks every month this year, the cumulative number of total demat accounts increased from 41 million at the beginning of FY21 to 55 million by the end of FY21, an increase of 34.7 percent, according to recent Securities and Exchange Board of India (SEBI) data. On an average, about 1.2 million new demat accounts were opened per month in FY2020-21 as compared to 0.42 million per month during the preceding fiscal. As of June end there were 62.16 million demat accounts in the country. The Central Depository Services (India) opened a record 1.47 million accounts in January, up more than threefold from the same month in 2020, and 1.36 million in February.

The travel and tourism industry has been one of the worst affected sectors due to the pandemic. In fact, the tourism industry was hit even before the lockdown as international flights started halting early last year. Mukesh Jagga’s 32-year-old tours and travels company saw a 50 percent dip in business in February 2020 itself. Jagga, who is the founder of Delhi-based Viva Holidays Tours & Travels, was in a dilemma considering he still had to pay his employees. “When the first lockdown was announced everything just came to a halt. Customers had cancelled bookings, some had postponed them. The biggest problem for me as an owner was how to retain my employees, for how long would this situation last, and for how long we would have to sustain by paying out of the pocket. Giving a salary to 22 people every month is no joke if you do not have any revenues. We tried to retain as many as possible, but still some people voluntarily left and we had to let go some people. By August, only six of them were remaining.”

Before the pandemic he was into long-term trading and also invested in mutual funds. Post the pandemic Jagga started short-term trading with an initial investment of Rs 15 lakh. He invested in Wipro, HCL, ICICI Bank, HDFC Bank, Bajaj Finance and so on. In the last one year, Jagga has invested over Rs 50 lakh and managed to gain 40 percent returns. Jagga also managed to buy into the IPOs of Devyani International and Zomato. By getting into the stock market, Jagga managed to pay salaries to his existing employees and keep his three-decade old business up and running. He is also not worried about the market boom petering out. “One sector or the other will always rise as someone’s loss is another person's gain. Even if the boom ends, remain invested in good company stocks and they will rise sooner or later. Remain invested, do not walk out is the real mantra,” he says.

Retail investors flocked to select sectors like healthcare, IT, auto and bank stocks with their indexes surging 104 to 160 percent, according to ACE Equity. Apart from pumping in money in the secondary market, new investors have also been chasing initial public offerings (IPOs) as well as newer avenues like crypto currency and non-fungible tokens (NFTs).

Twenty-six-year-old Aakarsh Shah was pursuing his Master of Law (LLM) from Deakin University in Melbourne, Australia, and towards the end of the course, managed to get a dream job as a legal assistant in August 2019. Before this he had been engaged in blue-collar jobs to make ends meet and pay his education loans. But with the outbreak of Covid-19, Shah lost his job. With the city under lockdown, there were no other jobs available either. And with the borders shut, there was no way he could return home. It was an alarming situation but Shah knew his next plan of action. He decided to invest dollars in the Indian stock market. “After speaking to some close friends who are actively involved in trading, I learnt about how the market works and decided to begin with investing in IPOs and do short-term and long-term trading. Due to the difference in time zones it used to be difficult for me to keep track of the markets so I got my mother interested in this too so that she could help me.”

Shah is not worried about the market crashing. According to him, there is risk involved in everything and he has diversified his portfolio by investing in different sectors. “Even if the market crashes I will still hold my investments. I will try to invest more at that time because I know it will rise up again and it will rise enormously. We’ve been trained to think risk-free, and think of security. Taking risks is important when you get into something new. When I got into the stock market I was very scared and nervous, I still am. But I spent 10 years to do my schooling, five years to get a degree and then two years to get a master’s. So I spent 17 years of my life to get a job which could possibly be taken away from me by one call, there’s no greater risk than that.”

Almost all the IPOs that came in early 2021 did well, but seven of the 10 IPOs that listed in August are hovering lower than the issue price—in fact, five listed at a discount to their issue price. There are a couple of reasons behind this, says Rishabh Parakh, chartered accountant and founder of NRP Capitals. “The quality of these businesses, apart from a higher valuation as compared to the earlier IPOs that came in the first half of the year. Then, the overall market sentiments are not in favour because of overall profit booking and also some of the promoters of these newly listed companies wanted to cash-out this opportunity. In fact, many high net worth individuals suffered losses because of the cost they incurred such as interest on the IPO funding they took.”

Past patterns of stock market booms suggest that it’s the institutional investors that are one of the first to enter—and gain—when the indices began heading northward. By the time retail investors enter—particularly the newbies—much of the surge would have taken place. Often, it’s the retail guy who is left holding the can once the boom has petered out, and those individuals who have entered the current rally purely riding on FOMO should keep this in mind. The same applies for IPOs, as typically the lesser-aware investors throw their hat in the ring by the time the relatively poorer quality issues hit the primary market.

New traders should also take into account that trading might not require formal education and the barrier to entry is low, but this does not mean that one must not exercise caution —it is easy to get carried away and be encouraged by short-term gains made, says Nikhil Kamath, co-founder of Zerodha and True Beacon. As with any other industry one should take up day trading if one has the temperament for it and if one is willing to put in the work to do research and not get swayed by tips from friends or stock tip gurus, he adds. “While it may not be advice you expect from someone who works in the brokerage space, caution is advised. Contrary to popular belief, an onslaught of new traders who invest and are not skilled and burn out is not good for our industry as well—instead, long-term, disciplined traders are more beneficial for the trading community.”

Twenty-five-year-old digital content creator and investor Raj Shamani has learnt to diversify to minimise risks. Shamani, who has been investing since he was 18, was into value investing before the pandemic hit and most of his investments and portfolio exposure were in real estate and business. “After the lockdown, I started exploring different avenues as well. Majorly in the stock market, the US stock market, cryptocurrency, private equity, and I have started investing in NFTs too. Now every penny that I make or have made till now, I invest 75- 80 percent of it and diversify my risk by investing in different investment opportunities,” he says.

Thirty-five percent of his investments are in Indian stocks through Portfolio Management Services (PMS) and smallcase 20 percent investments are in US stocks. Shamani has also dedicated 15 percent of his investments in early age startups like Wint Wealth, Scenes by Avalon, One Impression, MainStreet and so on. Ten percent of his wealth goes into cryptocurrency.

“I started exploring crypto last year in the last quarter because my cousin made good money in Bitcoin. I read about it for a month and felt really confident about how the space was strengthening so I bought my first Bitcoin in February this year at a price of Rs 32 lakh, then a few weeks later I bought Ethereum (ETH). It started as an opportunity and fun, but now I’m a bit serious about it as I believe more than a currency it has become an asset that people have started believing in and I also like the idea and technology behind it,” he says.

Starting off with colossal losses, Gala learnt some important lessons like the importance of thorough and extensive research, that the markets are very cruel and making money is not as easy as it looks from the outside, that as a short-term trader one must know how to override instincts and to never make a trade based on emotions. “If you want to turn profits consistently and independently, your understanding of the markets, analysis, experience and the individuals around you are very important. I’m not a fan of classroom learning and although today you can find hundreds of tutorials online, I went about it learning from experience, seniors and reading books that detailed the intricacies of the markets, and not just how to draw lines on a screen,” says Gala who recently graduated from KPB Hinduja College in Mumbai. He is also exploring and learning more about international markets.

According to Gala, indices are an accurate reflection of the potential of the Indian ecosystem, although he thinks the markets are rarely truly reflective of the nation’s economy. “Taking into consideration the geopolitical shift (most major players are shifting manufacturing away from China), there is superb potential for India’s economic growth, provided we play our cards right. However, the market is not just driven by on-ground performances and the growth I expect is still a long way into the future. At this very point, I believe we are in an elevated market, with a correction bound to occur sooner rather than later.”

Individual investors’ trading volume on the National Stock Exchange was more than 45 percent in 2020-21 and that makes a clear case of ‘fresh money’ (influx by new age investors) winning over ‘smart money’ (institutional/seasoned investors), according to Parakh of NRP Capitals. “But in the past few sessions, small-cap and midcap stocks have shown a downward trend. Even if we look at the NSE 500 stocks, almost more than 200 stocks have corrected anywhere between 20-75 percent from their peak i.e. 52-week highs. This is against the euphoria which was there till a few days ago where everyone i.e. seasoned investors or new-age investors were still scouting for the next big stock.” The sell-off happening in the midcap and small-cap stocks is also due to profit booking after a good run since the market crash of 2020 and it is also a sign that liquidity may not continue forever. Some sort of tapering would happen in the next few months before the world would come back to normalcy in terms of valuations and liquidity, he adds.

Ajay Menon, CEO, Broking & Distribution at Motilal Oswal Financial Services says that in the current market scenario where midcaps and smallcaps are getting battered severely, retail investors should remain cautious, especially the fresh investors. Short-term investors should trade cautiously and maintain some cap on the overall exposure while long-term investors with good quality stocks should hold on to their portfolios. He adds, “The best strategy would be to accumulate good fundamental and quality stocks gradually, whenever the market gives a sharp correction. We recommend maintaining adequate liquidity at individual portfolio levels, and to invest in the markets in a staggered, systematic way, with enough diversification across sectors. An investor should focus on asset allocation and build a diversified portfolio to navigate through such volatile phases. The long-term fundamentals remain intact and thus one should adopt a bottom-up strategy.”