Historically, during times of economic crises and recessions, investors from the retail and institutional categories have always shied away from investing in the stock markets. Instead, they have switched to safe-haven assets such as the U.S. Dollar and gold. However, during the current economic crisis that was brought about primarily by the ongoing COVID-19 pandemic, the situation has been quite the opposite. In a surprising move, the number of retail investors has actually increased during this period of uncertainty. Let’s take a look at some of the reasons why this might have actually happened. 

Reasons why Retail Investors Increased:

1. More awareness and easier entry

One of the main reasons for the increase in the retail investor base can be attributed to an increase in awareness about the stock markets. In fact, Upstox, one of the many discount brokers in India, reported that about 80% of its total customer base acquired during the pandemic period came from Tier-2 and Tier-3 cities. This data point strongly suggests an increase in the penetration of share trading and the stock markets.

Also, with the introduction of eKYC and Aadhaar eSign, almost all stockbrokers have adopted this methodology. This has made the trading and demat account opening process virtually paperless and completely online, making the entry into share trading smooth and seamless. Additionally, the many incentives and discounts provided by brokerages have also played a major role in attracting a sizable retail investor population.

2. Market crash and bottom fishing

The recent stock market sell-off in March 2020 set off a sort of a frenzy amongst the investor population. Almost all the sectors, industries, and companies faced a significant drop in their market value. Both the major Indian indices, Sensex and Nifty, dropped by around 30% in a matter of a few trading sessions.

Many retail investors perhaps thought that by entering when the market was bottoming out, they could enjoy some short-term gains when the markets finally went on a rise. This led to a huge wave of new and first-time traders flooding the market and trying their hand at bottom fishing. Even penny stocks were not spared, with many such stocks experiencing a never before rise in their stock prices.

Additional Read: Here are some Investment Tips by Experts for Post-pandemic World

3. Retail investors getting out of busy schedules

Nations around the world, including India, were forced to adopt stringent measures to combat the spread of coronavirus. One such measure was the string of widespread lockdowns that literally forced people to stay indoors for months. With almost the entire working population working from home, their schedules were not so busy anymore.

They suddenly had more time on their hands and consequently tried to put it to good use by getting in on some of the stock market action. Hordes of retail investors took out a part of their savings and tried their hand at share trading. This ultimately led to a record number of trading and demat account openings in the history of stock markets.  

4. Retail investors looking for alternative sources of income

As a consequence of the widespread lockdowns, many businesses were forced to suspend their operations and had to suffer serious setbacks. This directly impacted the revenues of many individuals who had to contend with little to no remuneration during this phase. Some of them suddenly found themselves laid off and without a job.

Under such dire circumstances, many such individuals turned to the stock market looking for alternative sources of income. The increase in retail investor participation in the month of June 2020 is in itself clear evidence of the rise in the retail and high networth individual investors’ share in the stock market.

5. Weak returns from other investment options

In the current economic scenario, the returns offered by many traditional investment options, barring gold, have been very lacklustre. The bank interest rates are quite low and the real estate sector is struggling to get back on its feet. Considering these circumstances, more number of individuals have turned to the stock markets in the hopes of generating some short-term profits to satisfy their financial goals. This has led to a boom in the number of retail investors in the stock market.  

Additional Read: Corporate Loan restructuring. Will it be a Boon or a Bane for the Economy?

Conclusion

Although there is a strong increase in retail investor participation in the stock market as of late, it still remains to be seen whether this trend would continue further. As the country and the economy slowly recovers, there’s a slight chance of these investors moving away from the stock markets and onto the more traditional investment options. But, for now, retail investors are here to stay.

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The instances when the government condemns the actions of the Reserve Bank of India, that too publicly have been few. But P. Chidambaram, then finance minister —  in response to RBI’s decision to keep policy rates stable in October 2012 — rebuked the RBI saying that if the government has to walk alone to face the challenge of growth, then “it will walk alone”.

What happens to interest rates in the country matters to a saver, investor, consumer as well as a borrower and thus has a wide economic and political implication. If the economic growth is weak, most stakeholders including the government wish for a rate cut. RBI being an independent body is more focused on the inflation levels, which often puts it on the cross-roads with the central government.

Before a Monetary Policy Committee (MPC) was constituted in 2016, the final decision on the policy rates was taken by the governor alone. But ever since a six-member committee has been entrusted with the task of deciding on the policy rates, it has, to an extent, ring-fenced the RBI governor from undue pressure from the government. Before we look at what the fist MPC achieved till date and whether it still is relevant, let’s briefly understand what an MPC is and why it was formed.

What is an MPC and what was the mandate given to this committee?

The six-member panel was formed to bring “value and transparency” to rate-setting decisions. The panel consisted of both, government and RBI members. The expert committee under the former governor of RBI, Urijit Patel, had suggested that RBI abandon the ‘multiple indicator’ approach and make inflation targeting the primary objective of its monetary policy.

So was the MPC able to tame inflation?

The MPC may be considered successful in this regard. According to news reports, in the 46 months of its existence, inflation has been within the RBI’s comfort zone — consumer price inflation at 4 per cent (+ or – 2 per cent) for 39 months. The MPC has brought inflation to the forefront of policymaking. Under an MPC, the Indian economy is unlikely to see a repeat of 4 years of double-digit inflation that prevailed between 2010 and 2013

Transparency in the rate-setting process and ‘guidance’

Thanks to the MPC minutes, the public is aware of RBI’s assessment of the economic situation and its mandate. What goes into the decision making is now in the public domain. It also keeps the market participants informed, which builds trust in the entire system.

Earlier in May, governor Shaktikanta Das had said that India’s economic growth rate will remain in negative territory owing to the lockdown enforced after the Covid-19 outbreak. While the investors were unclear amid high uncertainty, ‘guidance’ that is put out in the MPC minutes serves as a concrete and reliable analysis in such times.  

Additional Read: RBI Press Conference on Monetary Relief Measures in the Time of COVID-19: Key Takeaways

Independence of external MPC members

Policy debate between the members makes headlines. Every RBI minutes are put out after a few days of the policy decision. The independence of the external MPC members has been rarely questioned. The reasonable degree of disagreement between them is also evidence that the policy debate within the committee has been healthy. According to news reports, only 9 out of the 23 meetings so far produced unanimous decisions.

MPC utility beyond rate setting

In light of the economic slowdown since 2019, the RBI has not just relied on policy rates to help revive the economic situation in the country. Unconventional measures like standalone reverse repo cut, Operation Twist and targeted long term repo operations had been undertaken, often bypassing the MPC which questions the relevance of an MPC during the current circumstances.

Conclusion

The MPC was constituted with a clear objective in mind: inflation targeting. While the inflation figures in the last four years suggest that the MPC succeeded in its primary objective but the inflation numbers during the last three quarters have been worrying. CPI inflation has breached RBI’s comfort zone in recent months because of which the central bank was not able to slash rates further in order to support growth. RBI after its last MPC meet kept the key repo rate unchanged at 4 per cent in saying that the decision on repo has been taken while ensuring inflation remains within the target.

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In the beginning of August, the Association of Mutual Funds in India (AMFI) released its monthly report for the month of July, 2020 containing the net mutual fund outflow and inflow data. According to this research data, equity mutual funds saw a net monthly outflow of around Rs. 2,480 crores in the month of July, 2020. This monthly mutual fund outflow is actually the first ever, since the year 2016. Here’s an in-depth look at some of the reasons why this could have happened.

A drop in risk appetite

The nationwide lockdown imposed as a consequence of the coronavirus crisis led to many people losing their primary revenue stream. Lay-offs, job losses, and suspension of business operations were rife. Also, the recent brutal market sell-off in the month of March 2020 perhaps spooked the investors and caused widespread panic.

As a result, many investors, both retail and institutional, completely lost their risk appetite. This led to the investors pulling their money out from mutual funds. Some investors, upon redeeming their mutual fund investments, reinvested it in direct equity in the hopes of witnessing better overall gains.

Switch to fixed-income securities and safe-haven assets

The drop in the risk appetite of investors directly led to them investing in safe-haven assets and fixed-income securities such as debt funds and gold exchange-traded funds (ETFs). In fact, the monthly net inflow into debt-funds was around Rs. 91,391 crores as on the month of July, 2020. The high levels of net inflow into these funds clearly indicate the investors’ change in priorities.

Due to the increased volatility in the equity market, investors are now clamoring towards secure, better managed, and fixed interest earning investment options. In addition to debt funds, the net inflow into gold exchange-traded funds also witnessed a jump of around 53% month over month. As a matter of fact, the inflows spiked to around Rs. 921 crores in the month of July, up from around Rs. 494 crores in June. This is another clear-cut indication of investors adopting a safety-first approach to their investment capital.

Additional Read:  Understanding Mutual Fund Terminologies

Profit booking

A major reason for investors redeeming their mutual fund investments has to do with profit booking. After the sudden and extreme market sell-off in March, 2020, the markets witnessed a faster than expected recovery. This led to investors exiting equity mutual funds to cash out the profits earned by them.

The entire profit booking exercise could have been a major contributor to the high levels of net mutual fund outflow for the month of July, 2020. And, when you compare and contrast the decline in equity mutual fund inflows with that of the debt-fund inflow, it becomes quite clear that the investors booked profits and deposited their investment capital in secure fixed-income assets.

Fear of market correction

Investors expecting another sharp market correction is another probable reason why the month of July 2020 witnessed a decline in equity mutual funds. The sudden market sell-off has shaken up the investors and has pushed them towards capital conservation. As a result of this, many investors are seemingly exiting the mutual fund market due to the fear of having to face another deep market correction.

To be fair, the anxiety of investors is not totally unfounded. The current stock market recovery has been no less than miraculous due to the widespread increase in the stock prices despite the economy fighting a crisis. And so, it’s only a matter of time before the bubble bursts. Therefore, investors exiting equity mutual funds early before the next sell-off seems justified.         

Additional Read: Investing in different asset classes based on their risk

Conclusion

In addition to these, another compelling reason for the decline in equity mutual fund inflows could be chalked up to the decreasing cash reserves of investors. Since most of them have been rendered either jobless or with little to no income, they’ve relied on redeeming their mutual fund investments to meet their financial obligations. That said, with the recovery of the job market and the economy as a whole, the equity mutual fund inflows can also be expected to get back on track and return to how things were before the crisis came knocking.

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Much like its physical qualities of being resistant to corrosion, the price of gold has also withstood the test of time, and has become the go to investment for those seeking to obtain a degree of protection against the economic turmoil caused by COVID-19.

Despite demand for physical gold decreasing due to the lockdown measures, the price of gold has surged. On 3rd August gold was trading at close to an average of Rs. 54,000 for 10 grams, rising over 25-30% over the last year as investors have flocked to it as a store of value.  In May alone, Gold ETFs provided a return of 22% to investors.

Why?  As economies flounder under the strain of Covid, and people become more apprehensive about their economic future, they are turning to safer investments, which have little to no chance of losing the entirety of their value. Gold is regarded as one of the safest investments, and is linked to economic turmoil across history, always moving in contrast to other securities with more risk, such as equity. In the 1920s as well as in 2008, when the stock market plummeted, the value of gold went up. Alternatively, when stock markets experienced a positive upward trend in the 1980s and 1990s, gold saw its prices fall. This makes investing in gold an effective hedging strategy for investors, who are looking for long-term investments in which they can store value, with little risk during turbulent times.

Additional Read: Why Have Gold Prices Surged in the Past Year?

Why is gold rallying?

Though stock markets have rallied after the record lows of February and March, falling interest rates, a weakening U.S dollar and tensions around trade, and economic recovery continue to fuel the price of gold. Indeed, Gold prices have been steadily increasing for a while, particularly post the beginning of the US-China trade war in 2018, and rumours of global economic slowdown became more prominent in 2019.

COVID has only further aggravated many of the existing economic and geo-political tensions. As countries seek to tackle the virus through fiscal policy, and slashing interest rates, the yields of government bonds have decreased substantially, making these fairly risk-free investments less appealing to investors, particularly when adjusting for inflation. As massive stimulus cheques continue to be pumped in, many predict a coming inflationary period. Making long-term investments in Gold is widely regarded as a strategy for storing value during such periods, particularly in India.

Furthermore, gold is pegged internationally to the dollar. As the dollar has fallen in value, the strength of other currencies have increased, making gold more affordable and thus increasing demand for the same. When combined with the fact that the supply of gold has remained relatively stable, it is natural to see that the price of gold has soared, with some predicting that it could cross Rs. 60,000 per 10 grams in the coming months.

Additional Read: Why Gold is a Safe Investment Tool in an Economic Crisis

Investing in Gold

There are a number of ways in which one can use this opportunity to invest in gold, even if prices are now becoming prohibitory. While you can purchase physical gold in the form of jewellery, or gold bars and coins, investing in Gold ETFs, Digital Gold and Gold fund of funds are your best options in the current market. Gold ETFs in particular have posted strong returns in the current year, and at the same time given exposure to the commodities, though there are still some expenses related to it.

Conclusion

Gold has proven itself to be a solid contender among investments and investing in gold should be a part of one’s portfolio at all times.

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