With retail participation assuming a sizable weightage in the Indian stock market, the regulator SEBI should ensure that individual investors are constantly kept informed and educated about the market dynamics, since this segment of investors are 'highly sentimental driven', an ASSOCHAM-CareEdge Ratings report has said.
"Retail participation contributes to improving liquidity of markets and depth of the order book. A diversified investor base, comprising both retail and institutional investors is important for market resilience in emerging markets during periods of volatile international flows. However, it could also add to greater market volatility. Retail investors are highly sentiment driven and tend to engage in more speculative trading rather than in long-run buy-and-hold investment strategies. This could amplify market downturns and upturns. Therefore, there is a need for market regulators to ensure that the participation is informed and educated," the report emphasised.
ASSOCHAM Secretary General Mr Deepak Sood said strengthening investor awareness is imperative for a smooth functioning of the market. "Easy and improved access to digital financial services has resulted in increased retail participation of investors in the capital market, which also calls for a robust framework for investor protection, education, and awareness, given the significant technological advancements", he said.
It was in FY '21 that the stock market witnessed increasing interest from the retail investors. "Retail participation in the equity market witnessed a sharp jump in FY21 with greater involvement of tier 2 and tier-3 cities. The trend was driven by search of avenues for high returns by the investors in a low-interest rate environment and availability of high liquidity domestically and globally. The trend also continued in FY '22 and is clearly reflected in the number of demat accounts which scaled up significantly in that year. Indian investors opened a whopping 34.6 million demat accounts in FY22. This is nearly twice the number of accounts opened in the previous fiscal", the report noted.
Also, a shift has been witnessed in terms of distribution of turnover across different client categories. "The market share of individual investors rose to 45% in FY21, making up for nearly half of the market turnover at NSE. This was accompanied by a decline in the shares of corporates, domestic and foreign institutional investors. In FY22, the share of individual investors at 41% was above the pre-pandemic 5-year average of 37% but it declined from the peak of FY21".
However, there has been a decline in retail interest this year as well. One explanation could be heightened selling by foreign portfolio investors which caused their overall turnover and share to rise.