Volatile markets push Indian investors to hold firm

A lot of new investors learnt an old market lesson the hard way this year. Stocks do not keep rising just because everyone is excited.

Since September 2024, Indian equities have moved through a long spell of volatility and sideways trading. For anyone who entered after the pandemic, when apps made investing feel almost too easy, this has been a useful reality check.

Vinod Nair, head of research at Geojit Investments, argues that the market is quietly changing investor behaviour. The quick-profit crowd has not vanished. But more retail investors now seem willing to sit through discomfort.

Retail investors are growing up

The Bombay Stock Exchange’s Sensex and the National Stock Exchange’s Nifty 50 have looked weaker than some global markets in recent months. That headline can sound worrying. But the full story is not so simple.

Indian markets had become expensive after a strong post-pandemic rally. Earnings growth then slowed, while share prices still carried high hopes. That mismatch created pressure.

For a retail investor with a Rs 5 lakh equity portfolio, even a 10 percent fall means Rs 50,000 gone on paper. That hurts. It hurts more when the same investor had seen easy gains earlier.

But this phase has also taught a basic rule. Stock prices finally follow earnings, cash flows, and business strength. Themes can lift a stock for some time. They cannot carry it forever.

Nair says the recent weakness has pushed investors to think beyond momentum. In plain English, that means fewer people are buying only because a stock is rising.

Foreign money has been cautious

Foreign institutional investors, or FIIs, have been booking profits in India. These are large global funds that move money across countries. Their selling can drag big stocks down quickly.

For FIIs, India still looks costly compared with many other markets. Some developed markets offer cheaper valuations and clearer exposure to artificial intelligence and new technology themes.

That matters because global funds compare opportunities daily. If a fund manager in New York sees better value elsewhere, India has to wait its turn.

The rupee has also stayed under pressure. When the rupee weakens, foreign investors worry about losing money while converting returns back into dollars.

Crude oil prices add another layer of concern. India imports most of its oil. Higher crude can raise the import bill, widen the current account deficit, and put pressure on inflation.

For households, that can show up in fuel prices, transport costs, and grocery bills. Markets react before families feel the full squeeze.

Still, India has not lost its long-term appeal. Growth remains better than in many large economies. The question is whether companies can restart stronger earnings growth.

Nair expects the June quarter to remain weak. He sees better chances of stability by the September quarter, if global risks cool and domestic demand improves.

Diversification is no longer optional

The biggest shift for Indian investors may be mental. Many now understand that owning only Indian stocks can leave a portfolio exposed to one cycle.

Nair suggests that investors may consider putting 10 to 20 percent of their portfolio into foreign equities. That gives access to themes like AI and space technology, where India has fewer listed options.

For someone with a Rs 10 lakh portfolio, that means Rs 1 lakh to Rs 2 lakh outside India. It does not mean abandoning Indian equities. It means reducing dependence on one market.

This is especially useful when FIIs prefer other regions. Indian investors can still take part in global growth, instead of watching from the sidelines.

At home, defensive sectors have looked steadier. Pharma, healthcare, and telecom tend to hold up because people keep buying medicines, treatment, and connectivity.

FMCG may also attract interest if companies manage price hikes and volumes well. But heatwaves and a weak monsoon can hurt rural demand.

That is not a small risk. A poor monsoon can squeeze farm incomes, reduce rural purchases, and affect everything from soaps to two-wheelers.

IT is another interesting pocket. The sector has disappointed investors for some time. But valuations have cooled, and AI-led spending may create a longer opportunity.

Mid-caps still have support

Mid-cap stocks have rallied sharply over the past two months. Several indices in this space have touched fresh highs.

This is where the story becomes tricky. Mid-caps can create serious wealth. They can also fall harder when sentiment turns.

Yet domestic investors have kept putting money into mid-cap and small-cap funds. Systematic investment plans, or SIPs, remain a big support.

An SIP is simple. Investors put a fixed amount into mutual funds every month. That habit reduces the pressure to time the market perfectly.

This steady flow has changed the character of Indian markets. Earlier, heavy FII selling could shake everyone. Now, local money often absorbs part of that pressure.

High net worth individuals and companies have also supported flows. That has helped mid-caps stay firm even when foreign investors sold large caps.

But there is one warning sign. The SIP stoppage ratio has crossed 100 percent in some segments. This includes cancellations and completed SIP tenures.

Put simply, more SIPs are stopping than new ones starting in those areas. That does not mean panic. But it deserves attention.

If this trend continues, mid-cap funds may lose some of their cushion. For now, overall inflows still look strong enough to support prices.

Valuations, however, are stretched. Mid-caps trade at about a 45 percent premium to large caps. The three-year average is around 41 percent.

That tells investors one thing clearly. This is not a bargain market. Good companies may still do well, but careless buying has less room for error.

Large caps may regain attention

Large caps have lagged during this phase. Many FIIs sold these stocks first because they are easier to exit.

That underperformance may now create selective buying chances. If foreign selling eases, large companies could regain investor interest.

A more durable ceasefire between the United States and Iran would also help sentiment. West Asia matters to Indian markets because oil prices react quickly to tension there.

Lower crude prices would ease pressure on the rupee, inflation, and corporate margins. That would make India look better to foreign investors again.

Recent March quarter results were slightly better than expected. That gave markets some comfort. But the June quarter still looks soft.

The monsoon will be the next test. A steady monsoon can support rural demand and food prices. An uneven one can complicate the recovery.

For ordinary investors, the message is plain. This is not the time to confuse patience with blindness. Staying invested makes sense, but only with a clear asset mix.

The past 20 months have reminded India’s retail investors that markets reward discipline more than excitement. The next phase will test whether that lesson sticks when the next rally arrives.