India’s new investors can learn a few old lessons from Mr Chicken

livemint.com:

BSE SmallCap Index was down around 2-2.3% from its close on Friday (20 October). The small cap index is made up of stocks that rank beyond the top 250 when measured by market capitalization. Now, a fall of a little over 2% in stock prices at a broader index level isn’t really much.

Of course, specific stocks had fallen more than 2%. But even after taking that into account, the #stockmarketcrash hashtag was an overreaction at that point of time, and what this tells us is that a new set of stock market investors were getting to learn old investing lessons. In recent years, there has been a huge jump in the number of individuals investing in stocks.

The number of unique registered investors had crossed 50 million in October 2021. It crossed 80 million in September 2023, jumping 60% in less than two years. The number of investors buying stocks has steadily grown during the course of this financial year as well, and a lot of new money has come pouring into small cap stocks.

Indeed, from April to September, small cap mutual funds, which invest largely in these stocks, have seen inflows of more than ₹22,000 crore. To put this into perspective, these mutual funds saw inflows of a much less ₹16,632 crore during 2022-23. So, more money has come into small cap mutual funds in just six months during this financial year than in the whole of 2022-23.

All this money pouring in has driven up the valuations of small cap stocks. As of March end, the price-to-earnings ratio of the stocks that are part of the S&P BSE SmallCap index had stood at 22.2. By the end of September, this had jumped to 29.7.