The Indian stock market in February has bounced back strongly following a flat closing in January, surging to new heights and exhibiting remarkable strength.
Despite foreign institutional investors (FIIs) being net sellers thus far in 2024, the market remained unshaken, largely buoyed by significant support from domestic institutional investors (DIIs), that remain the primary driver behind the ongoing market rally.
The Nifty 50, which represents the country’s top 50 blue-chip companies across various sectors, has notched up several record highs this month, posting a nearly 2% gain. The mid-and small-cap stocks, on the other hand, have continued their winning momentum in CY24, showing no significant signs of cooling off despite trading at elevated valuations.
Amid this, a compelling question emerges: Are investors reevaluating their traditional approach to wealth preservation?
Historically, financial savings directed towards the Indian stock market have lagged compared to other major economies. However, this trend has been changing over the last decade as people are looking at the stock market as one of their investment avenues, allocating more funds to equities.
According to global brokerage firm BofA Securities, household savings are shifting from traditional bank deposits and non-bank deposits, to capital markets.
In FY2001, conventional bank deposits accounted for 39% of total financial savings, while capital markets only captured 4%. Fast forward to FY2023, and these figures stand at 37% and 8%, respectively, as per BofA Securities.
India is now the 5th largest equity market, and its market capitalisation will likely touch $10 trillion by 2030, said Jefferies.
Shifting investment trends
When asked about the potential shift from fixed deposits to equities amidst a robust rally in the equity market, Sreeram Ramdas, Vice President at Green Portfolio, said, “The data from banks has been weak when it comes to deposit growth. Much of the FD from risk-oriented investors has piled up into equity.
“The shift has already taken place for this season. 15% of household wealth is invested in bank deposits. Through time, in the long term, we expect this figure to shrink while equity penetration increases,” he added.
Regarding recommendations for retail investors in light of this market scenario, Ramdas emphasised the importance of diversification and vigilance. “There are specific sectors such as telecom and chemicals that are yet to experience earnings growth,” he advised.
“It would be prudent to steer clear of mainstream sectors like financials or automobiles and instead monitor emerging sectors. Additionally, maintaining a cash reserve of 7–10% would enable investors to capitalise on market corrections.”
On the other hand, Atul Parakh, CEO of Bigul, said, “The record highs in the stock market are likely to grab the attention of most of the retail investors. Fixed deposits remain a key component of conservative portfolios due to their stable, guaranteed returns.”
He continued, “Equities involve higher volatility and risks that limit substantial exposure increases for many retail investors, despite strong recent gains. Mutual fund SIP inflows show retail participation in equities is already occurring in a disciplined manner.”
Parakh cautioned against rich valuations in a late-stage bull run, suggesting that such conditions may deter lump-sum flows. “For long-term growth and diversification, investors are advised to maintain a balanced allocation between fixed income and equity,” he advised, emphasising the importance of prudence over performance-chasing based on market swings.
