The stock market has been on a roll.
Between the end of July and September 6, a period of around five weeks, the BSE Sensex, India’s most popular stock market index, has risen by around 10.9 percent. This when fixed deposit interest rates are at around 5-6 percent per year and real estate returns have been in low single digits across large parts of the country.
The fear of missing out or what the zoomers like to call FOMO, has taken over big time among retail investors as well as foreign institutional investors.
The foreign institutional investors had taken a break from buying Indian stocks and net sold stocks worth Rs 11,308 crore during July. In August, they made small bets and invested a total of Rs 2,083 crore in the month. But the flood gates have opened in September and more than Rs 4,000 crore has been invested by foreign investors in the first few days of the month.
When it comes to retail investors, many of them have seen their friends and family make a quick buck by investing in stocks over the last 16-17 months and are now finally getting into the game.
In fact, in economics, the law of demand states that the demand for a good or a service goes up if its price falls and vice versa. When it comes to investing in stocks or real estate for that matter, the reverse is true. A large bunch of people genuinely start to get interested once they have seen stock prices rise for a while.
Stock prices have now continuously risen and more than doubled from April 2020 onwards. Also, as the economic historian Charles Kindleberger once famously said: “There is nothing so disturbing to one's well-being and judgment as to see a friend get rich.”
These factors have put the fear of missing out in the minds of many individuals. This has led them to the stock market, both in direct and indirect ways. This can be seen from the fact that the new equity schemes launched by mutual funds have managed to attract investments worth thousands of crore. This is money coming in from retail investors which will finally be invested in stocks.
When it comes to retail investors, there is another factor at work. Many such investors had invested in fixed deposit which paid an interest of 8-9 percent a few years back. This investment is now maturing and needs to be redeployed.
If they stick to fixed deposits, the interest that they are likely to earn on their investment is 5-6 percent. Also, this interest is not tax-free and income tax needs to be paid on it at the marginal rate. The rate of retail inflation in July had stood at 5.6 percent. Hence, the rate of interest being offered on fixed deposits is just about meeting the rate of inflation.
In this scenario, many individuals are choosing to take on a greater risk in the hope of earning a higher return by investing in stocks. Hope has become an investment strategy and that has also driven stock prices up.
There are a few other factors at play as well. Investing in stocks has become easier over the years thanks to apps and the availability of cheaper internet. The work from home phenomenon, the rise of influencers and the social media, is also feeding into rising prices.
The question on everyone’s lips is, how long is this going to last? Well, on that your guess is as good as mine.
(Vivek Kaul is the author of Bad Money. He tweets @kaul_vivek)
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