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Market Watch: Exit speculator, enter investor

india Updated: Feb 03, 2008 19:19 IST

A large percentage of what we typically call "retail" investor money is the type which gets into the stock market towards the final stages of a long and unbroken market upmove. This money is essentially speculative in nature and chases momentum returns. We have witnessed the entry of this money into the market in the last quarter of 2007 and it's subsequent exit in the January carnage. There is, perhaps representing a smaller percentage, another class of retail participants who fit more into the "investor" profile. This is the category which doesn't buy stock futures but either takes delivery of good stocks and holds for a while, buys mutual fund units or gets into good IPOs.

While the retail speculator has exited the scene post crash, it is very heartening to see that the retail "investor" has approached this fall as an opportunity, albeit somewhat gingerly. In earlier stock market crashes, mutual funds would face significant redemption pressures, as retail unitholders panicked and rushed in to cut losses. This time, there has actually been a net inflow of nearly 2 billion dollars into equity mutual funds since the market crashed. A large part of this, one would like to believe, is investors trying to use lower stock prices to increase their stock market exposure.

Any brokerage worth it's name will tell you that a large number of retail and HNI clients were trying to get in touch with them the day the market was on down circuit, to buy bluechip stocks. Now, it's another matter that brokers could not or refused to process these orders as they had other compulsions on that day. I personally know several people who had not bought a single share since the Sensex crossed 17000, who went out and bought while the market crashed. At one level, it reflects a maturity and newfound conviction in the long term prospect of the Indian market; at another it tells you that a large number of these investors have been left out of this multi year bull run and are using every meaningful dip in the market to try and get in.

This is very encouraging. One avenue which this category of investors have historically used to enter late is the primary market. This was based on a belief that IPOs from good companies generally came at a "safer" price point for a new entrant and went on to create wealth over a period of time. Sadly, in the era of grey market pipedreams we live in today, that may not hold true and I fear that the faith of the gullible retail investor will get betrayed. This may cause long-term damage to the psyche of the retail investment cult in India which cannot be good for any market participant save the fly by night operator.

(The writer is Executive Editor, CNBC-TV18)