Investors shifted towards risk averse fund based investments

- The number of active traders on NSE also decreased for the eighth consecutive month: Declining participation of retail investors in IPOs

Rising interest rates and a weak stock market have influenced the behavior of retail investors. Investments in equity mutual funds remain strong but individual investors are avoiding direct exposure to the stock market. The data also shows that some investors have shifted to fixed income schemes instead of equities while others have opted for the derivatives space.

According to National Stock Exchange data, individual investor participation was at a multi-year low in January 2023 and the number of active traders on the NSE also declined for the eighth consecutive month. Small cap category stocks, which are favored by retail investors, fell. This indicates that the demand for these stocks is low. This is a strong indication of waning interest from retail investors. While the Nifty 50 has gained 3.5 percent in the last 12 months, the Nifty Small Cap 100 index has fallen 10 percent over the same period.

NSE estimates that individual-level investors, including high-income individuals, will spend Rs. 22,829 crore was invested, which is the lowest monthly investment since March 2020. Also, in February 2021, it will be Rs. 58,409 crore is much lower than the record investment. In the cash segment, the share of retail investors declined to 44 percent from a peak of 66 percent.

In January, NSE's number of active accounts stood at 3.4 crore, down three percent from December 2022. This was the eighth consecutive month of decline in their numbers. In June 2022, these accounts peaked at 3.8 crore. Declining IPO activity is another sign of declining participation from retail investors.

Brokers claim that the rate of opening demat accounts, which is directly related to the entry of retail investors into the market, has also slowed down. Tighter regulatory framework and stricter margin requirements etc. have also affected the less capitalized retail investors in the cash segment.

However, mutual fund data suggests that retail participation in the sector is still strong. In equity mutual funds and hybrid funds in January Rs. 17,000 crore was seen inflow. Both these sectors are dominated by retail investors. This is higher than the third quarter of October-December 2022. At that time in these two sectors a total of Rs. 11,910 crore was invested.

The contribution of Systematic Investment Plan (SIP) in the first 10 months of the financial year 2022-23 was also Rs. 1.28 lakh crore which is Rs. 1.25 lakh crore is more than Rs. Since SIP is being adopted only by retail investors, it also indicates that they are still enthusiastic about it. Tighter monetary policy, shorter settlement periods and tighter margin requirements may also have affected retail investor participation in the cash segment. There are also signs that some traders are moving into the derivatives space as daily futures and options trading has more than doubled over the past 12 months.

Overall, it seems that risk averse retail investors are shifting towards fund-based investing and paying more attention to fixed deposits. At the same time high risk appetite day traders are turning to derivatives where more liquidity is available at similar margins.