NEW DELHI
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In recent years, retail investors have emerged as a formidable force in India’s equity markets, driven primarily by the growth of mutual fund investments through systematic investment plans (SIPs). However, this influx of “uninformed” retail money is inadvertently creating exit opportunities for seasoned “smart money” investors—such as promoters, private equity funds, and multinational corporations (MNCs). While these sophisticated investors capitalize on elevated valuations, they are taking money home, raising concerns about unintended consequences. Could retail money be inflating market valuations to unsustainable levels and crowding out foreign portfolio investments (FPIs)?
Retail money overpowering foreign flows
The dominance of retail investors is reshaping the landscape of Indian markets. Retail mutual fund flows through SIPs since 2016 amount to ₹9.89 trillion, surpassing the cumulative inflows from FPIs of ₹6.56 trillion. This tidal wave of retail inflows has driven market valuations into uncharted territory, creating a market that seems to be running on liquidity rather than fundamentals.
In just four years, retail assets under management (AUM) in the mutual fund industry have more than tripled, crossing ₹17 trillion. Retail investors now account for 27% of the total AUM in mutual funds. As of August 2024, there were 204 million mutual fund accounts, with 80% belonging to retail investors. While institutional investors such as high-net-worth individuals and banks still hold larger stakes overall, retail investors have gained significant influence in equities.
The surge in retail participation
The retail story extends beyond mutual funds. Direct investments through demat and broking accounts are also on the rise. As of August 2024, there are 171 million demat accounts, with retail ownership by value surging from ₹8 trillion in March 2020 to ₹63 trillion today. By comparison, FPI ownership currently stands at ₹78 trillion.
This shift has been fueled by the digitization of trading platforms and apps, which make it easier for first-time investors to participate. However, many retail participants lack the financial literacy to understand market cycles and valuation risks. Consequently, they may end up holding overpriced assets when seasoned investors with a deeper understanding of market dynamics are quietly exiting.
Retail flows: A floodgate for smart investor exits
The massive inflows from retail investors have provided an attractive exit opportunity for sophisticated players. Over the past 15 months, Indian promoters have sold over ₹1.17 trillion in equity, with ₹0.82 trillion occurring in 2023-24 alone. MNC parents have offloaded ₹0.74 trillion worth of stakes, and private equity funds have exited positions worth ₹1.15 trillion during this period. These figures highlight how retail investors are facilitating exits for “smart money”.
Several high-profile transactions illustrate how retail-driven liquidity has allowed seasoned investors to lock in profits. In 2024, Whirlpool reduced its stake in its Indian subsidiary from 75% to 51%, selling a 24% stake to domestic mutual funds for $468 million.
British American Tobacco sold a 3.5% stake in ITC for ₹17,400 crore, while Tencent sold a 2.1% stake in PB Fintech, halving its position and raising ₹1,668 crore.
Private equity funds have also benefited. In 2024, Blackstone sold a 15.1% stake in Mphasis for ₹6,736 crore, with buyers like Kotak MF and Morgan Stanley. Warburg Pincus sold its 6.45% stake in Kalyan Jewellers for ₹3,584 crore, and Bain Capital exited Axis Bank, selling its remaining 1% stake for ₹3,574 crore.
IPOs: A new avenue for smart money exits
The public listing has become another exit vehicle for smart money. In the last 15 months, 91 initial public offerings (IPOs) raised ₹0.80 trillion, with two-thirds structured as “offers for sale” (OFS), allowing private equity investors and promoters to cash out. The IPO pipeline remains strong, with another ₹0.93 trillion in offerings expected, much of which will facilitate exits for institutional investors.
Unintended consequences and the way forward
While retail money continues to drive the Indian equity bull market, it is also setting the stage for potential risks. The heavy retail participation creates lucrative exit opportunities for seasoned investors, leaving retail investors exposed to overpriced assets. The lack of financial literacy among retail participants is a pressing concern. Without a deeper understanding of market risks, retail investors may be setting themselves up for financial distress when market corrections occur.
To mitigate these unintended consequences, there must be a concerted effort to enhance financial literacy. While the Association of Mutual Funds in India’s Mutual funds sahi hai campaign has been effective in promoting SIP investments, there is a need for a broader educational push around market risks and valuation discipline.
Amit Goel is co-founder and chief global strategist at Pace360.