Private customer funds lead to quiet exits among experienced investors

Retail funds are overwhelming foreign flows

The dominance of retail investors is changing the landscape of Indian markets. The inflows of retail mutual funds through SIPs since 2016 have been ₹9.89 trillion, which exceeds the cumulative inflows of FPIs ₹6.56 trillion. This tidal wave of retail inflows has pushed market valuations into uncharted territory, creating a market that appears to be more reliant on liquidity than fundamentals.

In just four years, retail assets under management (AUM) in the mutual fund industry have more than tripled ₹17 trillion. Private investors now account for 27% of total assets under management in investment funds. As of August 2024, there were 204 million mutual fund accounts, 80% of which belonged to retail investors. While institutional investors such as wealthy individuals and banks still hold larger shares overall, private investors have gained significantly more influence when it comes to stocks.

The rise in retail participation

The retail story goes beyond mutual funds. Direct investments through demat and brokerage accounts are also increasing. As of August 2024, there were 171 million demat accounts, with the value of private holdings rising sharply ₹8 trillion in March 2020 ₹Today 63 trillion. In comparison, FPI ownership currently stands at ₹78 trillion.

This shift has been driven by the digitization of trading platforms and apps that make it easier for first-time investors to participate. However, many retail participants lack the financial literacy to understand market cycles and valuation risks. As a result, they may end up holding overvalued assets as sophisticated investors with a deeper understanding of market dynamics quietly exit.

Retail flows: A floodgate for smart investor exits

The massive inflows from retail investors have provided an attractive exit opportunity for sophisticated players. In the last 15 months, Indian promoters have sold more ₹1.17 trillion equity capital, with ₹0.82 trillion will occur in 2023-24 alone. MNC parents dumped ₹Holdings worth $0.74 trillion and private equity funds exited positions worth $0.74 trillion ₹1.15 trillion during this period. These numbers illustrate how small investors can make it easier to exit “smart money”.

Several high-profile transactions illustrate how retail-driven liquidity has allowed sophisticated investors to lock in profits. In 2024, Whirlpool reduced its stake in its Indian subsidiary from 75% to 51% and sold a 24% stake to domestic mutual funds for $468 million.

British American Tobacco sold a 3.5 percent stake in ITC for ₹17,400 crore, while Tencent sold a 2.1% stake in PB Fintech, halving and increasing its position ₹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 Jewelers for ₹3,584 crore, and Bain Capital exited Axis Bank and sold its remaining 1% stake for ₹3,574 crore.

IPOs: A New Path for Smart Money Exits

IPO has become another exit tool for smart money. There have been 91 initial public offerings (IPOs) in the last 15 months ₹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 one to come ₹Offerings worth $0.93 trillion are expected, much of which will help institutional investors exit.

Unintended Consequences and the Path Forward

While retail money continues to drive India’s equity bull market, it also sets the stage for potential risks. Heavy retail investor participation creates lucrative exit opportunities for sophisticated investors, exposing retail investors to overpriced assets. The lack of financial literacy among retail participants is a pressing issue. Without a deeper understanding of market risks, retail investors could find themselves in financial trouble during market corrections.

To mitigate these unintended consequences, concerted efforts to improve financial literacy must be made. While the Association of Mutual Funds in India Mutual fund Sahi Hai Although the campaign has proven effective in promoting SIP investments, there is a need for greater education on market risks and valuation discipline.

Amit Goel is co-founder and chief global strategist at Pace360.