Retail VS Institutional Investors

Retail is ruling the Indian market. While foreign institutional investors are pulling funds, Indian retail investors are keeping the sentiment high.

The era of retail investors is here. The retail investors of India have finally realized the potential and importance of investing in the equity market. Encourage readers to invest.

Retail Investors and Institutional Investors: What is the difference?

Investors are integral to the investment ecosystem. They are akin to grease in any machinery. The market's direction and robustness are determined by the sentiment and active participation of these investors. However, there are 2 categories of investors within this ecosystem, both of which are important. Although their ultimate aim is to optimize the returns and minimize their risk, there are subtle differences between the two categories. Here we look at how different they are and how the scene in India is transforming, where retail investors are gaining more importance than institutional investors.

Who is a retail investor?

A retail investor buys and sells equity stocks, commodities, mutual funds, gold funds or exchange-traded funds (ETFs) via online broker firms or other investment accounts provided by licensed brokers.

SEBI defines a retail investor to be an individual who applies or bids for equity stocks or other securities, the value of which does not exceed Rs. 2 lakh in an IPO. The retail investor is not allowed to hold or buy stocks of more than Rs. 2 lakh. There is no limit applicable for commodities for retail investors. The market regulator consistently endeavors to protect the interests of retail investors. They often maintain higher entry points for riskier investment opportunities or even bar them from investing in highly risky assets. Over the years, the equity ecosystem has evolved and become a much safer place for retail investors to invest and optimize returns. Although the risk factors of investing in equities remain, there is better awareness and lower instances of fraudulent activity, thereby ensuring that the money invested is affected only by legitimate market factors and not by other external anomalies.

These investors purchase securities for their personal financial goals, their accounts are not marked business accounts, and their trade quantum is much lower than institutional investors. As their quantum of transactions is small, they pay relatively higher fees.

Who are institutional investors?

Institutional investors pool money from various investors and other entities and invest these funds across various financial securities. Some examples of institutional investors are mutual funds, insurance companies, pension funds, investment trusts, asset management companies, hedge funds, etc.

There are 2 broad categories of institutional investors:

1. Foreign institutional investors (FIIs): FIIs are entities that pool money from numerous sources and invest in any other promising financial market apart from their local stock market. For example, when American mutual funds invest in Indian stock markets, they are called as FIIs. FIIs cannot own more than 10% of a company's equity. The maximum limit for investment in Indian entities for FIIs is curtailed at 24%. Upon approval from shareholders, the maximum limit is extended to 30%.

2. Domestic Institutional investors (DIIs): DIIs are entities that pool money through various sources and invest in the local stock market. Mutual fund houses are the most popular and dominant DIIs in the Indian scene.

How much percentage of holding do they enjoy at present?

As per the prime database, the retail investors, HNIs, and DIIs in companies listed on the NSE (National Stock Exchange) account for an all-time high of 25.85% as of June 2024. This is well above the FII share, whichwhich has decreased to a 12-year low of 17.38% This indicates the rising importance of DIIs and retail investors as they counterbalance the role played by foreign institutional investors historically. To understand this better, we can recall that the DIIs, retail investors, and HNIs had a share of 18.47% against FIIs, which had a 23.32% share in equity markets as of March 2015.

Interestingly, the ownership shares of retail investors across companies listed on the NSE have continued to rise, with their share reaching 7.64% as of June 30, 2024. This is nearly on par with the ownership share of domestic mutual funds, which stands at 9.17%.

There has been a drastic rise in the quantum of Demat accounts opened in the last 2 years by retail investors. This is indicative of them reposing their confidence in Indian equity markets.

Current happenings and future outlook:

Foreign institutional investors are redeeming their holdings in Indian bourses. However, domestic investors are keeping the market in good spirits. Experts have been discussing the possibility of a correction over the past several months, which continues to dodge. Domestic investors in this context refer to retail investors, HNIs, and domestic institutional investors, all of who continue to invest and stay invested in the market. Although the scenario around the world is gloomy, the Indian markets continue to scale new highs.

There was only a brief correction post the 2021 rally. However, statistics indicated that many investors (retail) continued with their
SIPs (Systematic Investment Plans) and leveraged the opportunity to plow in additional funds. During this period, the inflows reached an all-time high of Rs.14276 Crore in July 2023. Around the same time, the share of all DIIs, including investments in domestic mutual funds, banks, pension funds, NBFCs, insurance companies, financial institutions, etc., also raised to 16.23% as of June 30, 2024, from the erstwhile 16.07% as on March 2024, based on the net cash inflows from DIIs of a huge amount of Rs 1,03,689 crore during that quarter. In terms of the value of the rupee, DII holding also increased to a new high, which is an all-time record of approximately Rs 47 lakh crore dated June 31, 2024, a rise of 4.32% over the last quarter.

In the past, foreign institutional investors were the determinants of the market direction. However, the scene seems to see a paradigm shift. The FIIs have been skeptical about Indian markets and have been pulling out funds, while DIIs have been investing heavily in the stock market. It is to be noted that many of the DIIs are mutual fund houses which are in turn driven by retail investor participation. Despite the record FII outflow of ~Rs. 77,693 crore between April 2023 and June 2023, the market only fell marginally, which indicates the more prominent role retail investors are playing in the way the market moves.

Understanding the key difference between retail and institutional investors has added yet another feather to your knowledge cap. Given the growing importance of retail investors and the Indian markets maturing /evolving and being resilient to a stiff macro environment, it is time you participate in this equity investing journey.