Surge of first-time stock market investors: A warning sign?

livemint.com:

investors, fatigued by waiting, are now compelled by frustration—perhaps even desperation—to dive into the market. The disciplined patience that kept them at bay has given way to an urgency to join the action. Who are these investors? (Note: I’m generalizing here.) They are typically drawn to stocks that are already in motion, the market's hot favourites.

The idea, endorsed by some market gurus, is that what's moving will keep moving—momentum, they call it. The allure of "easy money" is strong. Interestingly, mutual funds seem to be a distant second option for these investors.

The reason? Returns from mutual funds don’t roll in as quickly (potential losses aren’t factored into their decision-making). Read this | What upcoming NFOs tell us about the state of mutual funds industry in India The mutual fund industry is attempting to address this by pushing thematic and sectoral funds, which promise more movement. But let's set that aside for now and focus on the influx of new money into the markets.

There's a noticeable influx of new investors, and broadly speaking, they seem to be chasing stocks and themes that are currently in vogue, with little regard for long-term consequences. Consider the data on demat accounts opened in India: after a brief lull, interest has returned with a vengeance. This influx is like opium for the markets—new investors mean new money.

But where is this money going? Since the data on mutual funds is very readily available, let’s use that as a benchmark. This is the data for July 2024: Data from mutual funds provides a clear picture: investors are chasing hot themes, sectors, and, of course, small caps. It’s safe to assume that some of this capital is coming from new investors eager to ride the