At a time when foreign investors are jittery and pulling out money on concerns of rate hike by the US Fed and retrospective tax implications, domestic investors are making a beeline to invest in the stock markets. Betting on the economy growing at a faster pace, domestic institutional investors such as mutual funds, banks and insurance companies reportedly invested a record of $3.13 bn in the markets in the last two months. The exodus of foreign funds from the markets stood at $2 bn in the last one and half months.
Faced with suboptimal returns from traditional asset classes such as gold and real estate, even retail investors are increasingly heading for the equity markets. The fact that the BSE Sensex yielded returns of 30% in 2014 is another point of attraction for retail investors. According to Association of Mutual Funds in India, domestic equity funds have seen average monthly inflows of US$ 1 bn in the last one year after witnessing years of outflows. As equity investments account for a mere 2.5% in the total financial assets of Indian households compared to 35% in the US, a large amount of retail participation is yet to be tapped.
Therefore while the stock markets remain vulnerable to global uncertainties, active participation by domestic investors will act as a cushion against huge selloffs and drive markets in the long run. However, retail investors also need to be careful as they have burnt their fingers several times during market crashes in the past. Retail investors had eroded their wealth as they entered markets at peak valuations that more than halved in 2008. While investors today have access to much better technology that have led to improved dissemination of information, they still need to make the right investment decisions based on fundamentals rather getting swayed by the herd. Only then can the retail investment community be able to derive long term gains from equity investing.