The bravado of retail investors: Buying the dip or skating on thin ice?

Buying the dip involves purchasing stocks during price declines, betting on a rebound. To be sure, this could be a lucrative strategy, but is typically more suited to seasoned investors, such as institutional players who trade on behalf of individuals, aiming for long-term gains.

Retail or individual participation in the stock markets has surged in recent years, with the benchmark Nifty50 and Sensex on a tear fuelled by India’s strong economic and corporate growth.

Yet, risks abound. India’s stubborn food inflation, high interest rates, slowing corporate earnings growth, and geopolitical uncertainties—including the escalating West Asia and Russia-Ukraine conflicts and potential economic disruptions from Donald Trump’s return as the US president—pose formidable challenges.

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Despite this, retail investors purchased a net ₹33,065 crore from the National Stock Exchange’s secondary or cash market between 1 October and 14 November. In that period, the Nifty shed almost 9% to settle at 23,532.7 points.

This data, which NSE sends to the Securities and Exchange Board of India, includes partnership firms and limited liability partnerships in the retail category along with individual domestic investors, non-resident Indians, sole proprietorship firms, and Hindu Undivided Families.

Direct retail investments into NSE’s cash market surged to a net ₹25,607 crore in October from outflows of ₹7,422 crore in the month before, exchange data show. NSE, which is yet to update category-wise turnover data post 14 November, had a 94% share in the cash market based on October turnover data, with BSE accounting for the rest.

“‘Buy the dip’ seems to be working all the time. This may lead to a temptation," said Rajeev Thakkar, chief investment officer and director at PPFAS Mutual Fund.

Although India’s equity markets have delivered positive returns in every calendar year since 2019, these last few years do not constitute the entire history of the stock markets, Thakkar warned.

Stocks have witnessed extended periods of “sub-fixed income instrument returns, and, in some cases, negative returns as well", he said. “If in each year equity gives positive returns why bother with bank FDs (fixed deposits) or bonds or debt mutual funds at all?"

An unfavourable tradeoff

Mutual fund managers remained cautious about investing in the stock markets even as the Nifty and Sensex climbed to record highs in September, as Mint reported at the end of that month.

PPFAS, among India’s top 20 fund houses by assets, has been increasing its cash holdings— from 11.23% of its total equity assets in cash in June to 15.46% at the end of October, per PRIME Database. India’s largest fund house, SBI MF, increased its cash holdings to 6.5% in October from 5.13% in the preceding month.

Monthly investment payouts by investors, or systematic investment plans (SIPs), to mutual funds rose to a life high of ₹25,323 crore in October.

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That month, the Nifty fell 6.2% to 24,205.35 points on record selling of ₹1.14 trillion by foreign institutional investors in the cash market, per data from the National Securities Depository Ltd, amid rising US bond yields and disappointing corporate earnings.

“Buying the dip in prevailing market conditions makes sense if the investor has an investment horizon of at least 12-18 months," said Gaurav Dua, senior vice president–head of capital market strategy, at brokerage firm Sharekhan by BNP Paribas.

While much of the price damage in the large-cap stocks “is behind us" in the recent correction, pockets in the broader markets remain overvalued, making the risk-to-reward tradeoff unfavourable, he added.

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‘Skating on thin ice’

Sudip Bandyopadhyay, group chairman, Inditrade Capital Ltd, agreed that only those investors with a long-term horizon should view the current dip as a “buying opportunity".

“Given the inflation-interest rate interplay, markets are expected to trend sideways with a negative bias as there is no positive trigger over the near-term, though I expect companies to churn out relatively better performance in Q3 and Q4FY25 (the third and fourth quarters of 2024-25)," Bandyopadhyay said.

Also read | Nifty earnings growth estimate for FY26 looks tough: Kotak MF’s Nilesh Shah

Motilal Oswal Financial Services Ltd recently cut its estimate on the Nifty earnings per share by 1.4% to ₹1,057 for 2024-25 and by 2.2% to ₹1,241 for 2025-26. It also downgraded its stock recommendations for Oil and Natural Gas Corp. Ltd, Bharat Petroleum Corp. Ltd, Reliance Industries Ltd, and Tata Motors Ltd.

“The surge in food price inflation rules out a rate cut by RBI (Reserve Bank of India) in December, while rising bond yields in the US mean more foreign fund outflows from EMs (emerging markets) like India," Bandyopadhyay added. “In the given situation, those buying the dip for quick gains may be skating on thin ice."

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