Index returns may be quite misleading to judge returns of retail investors: Kotak Equities

India’s stock market may be sitting on a precarious edge, with retail investors facing significantly weaker returns than headline indices suggest, a Kotak Institutional Equities report stated. Despite the Nifty 50 and Sensex showing resilience, retail investors who entered at higher valuations and injected more funds at market peaks have seen their returns eroded, the brokerage noted.

“In our view, the returns of headline indices (largecap., midcap. or smallcap.) may be quite misleading to determine the returns and future investment behaviour of retail investors,” Kotak said in the report. “In fact, they may overstate the actual returns of investors for two reasons — a number of investors have come to the market at higher levels and a lot more money has come ‘into’ the market at higher levels.”

The brokerage added that taxes and trading costs have further dented retail returns, and with trailing returns turning weak, the market could already be “on thin ice.” While 12-month returns for Nifty 50 remained slightly positive at 6%, the index witnessed six-month and three-month declines of 5% and 4%, respectively. The midcap and smallcap indices fared worse, with six-month declines of 11% and 13%, respectively.

Retail participation surged in 2024, with mutual fund investors rising from 45 million at the end of 2023 to 53 million by December 2024, Kotak’s data showed. However, many of these new investors, particularly those investing in “narrative” stocks, have had a rough ride, with several of these stocks suffering sharp corrections in recent months.

The Nifty 50 and BSE Sensex have witnessed declines of 12.4% and 11.5% from their respective peaks.

Kotak also pointed out that “old” investors, while more seasoned, have likely deployed larger sums at higher valuations, especially in sectoral and thematic funds that raised capital near peak levels.The near-term trajectory of the Indian equity market may now depend on whether these retail investors choose to hold their positions or liquidate in response to weaker returns. “The behaviour of retail investors over the next few weeks/months will determine the course of the Indian market,” Kotak said.With foreign portfolio investors (FPIs) offloading $28 billion from the secondary market in recent months, domestic institutional investors (DIIs) have absorbed much of the selling pressure. However, the extent to which retail investors can continue to support valuations remains uncertain.

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