HDFC Bank, L&T, RIL, SBI: Retail investors dump blue chips in one year; will it be a costly mistake?

Indian markets are bleeding red in the aftermath of the ongoing conflict in the Middle East. The recent sharp fall in the markets has left many investors puzzled about the outlook for the coming financial year. Indian retail investors have witnessed nearly 18 months of flat to negative returns after a relentless rally started in 2020. Since the benchmark indices made record highs in September 2024, investors have struggled to generate sizable returns in the markets, vital to keep them committed in the markets.

Psychologically, the recency bias plays a very important role in investing. Investors who made “easy money” during bull markets often expect the performance to continue forever. Conversely, investors who have endured the dull period since September 2024 are expecting more muted returns in the markets.

This recency bias has led many investors out of the markets by exiting their direct stock positions in the last year. Investors pumped in major positions when stocks were hitting record high’s and tend to exit when they underperform or go into a correction mode.

Smart and experienced investors view this as an opportunity to enter into long-term positions. Historical data suggests that stocks tend to outperform NIFTY50 in periods when retail shareholding declines substantially. Here are a few examples

Axis Bank

Shares of Axis Bank saw a sharp, nearly 6% decline in the number of retail shareholders during December 2022 to June 2024, during the mass liquidation by retail investors period, the share price gave nearly 36% returns in the same period. The total number of shareholders went down from 8.8 lakh investors to 7.6 lakh in the above-mentioned period.

Tech Mahindra

Shares of one of the leading IT companies, Tech Mahindra, also went through a mass exodus of retail investors from March 2023 to December 2024. According to the screener.in data, the retail shareholding went down from 12.07% to 9.8%. Conversely, the DII holding in the same period went up from 25.6% to 30.7%. The strong accumulation by the DII led to a sharp rally of over 60% in the same period.

Divis Laboratories

Share of Divis Laboratories went up over 80% in a period of eight quarters, starting March 2023 to December 2024, before correction. The stocks witnessed a similar phenomenon where the retail shareholders reduced their holding from 12.3% in March 2023 to 9.5% in December 2024. The number of shareholders also went down from 4.3 lakh to 2.8 lakh in the same period. During that period, FIIs accumulated the shares and raised their holding from 14.6% to 17.9%.

Eternal

The food delivery giant saw a massive erosion in market cap from November 2021 to July 2022, evaporating nearly 73% of the market capitalisation. During this period, the retail shareholding went in excess of 35% till March 2023. Investors slowly started liquidating their stake as the retail shareholding went down from 35.1% in March 2023 to 26% in December 2024. During this period, the share price skyrocketed from ₹51 to ₹278 apiece.

The above stocks are key examples of recency bias, which led the retail investors to liquidate their position at a loss. Whereas the experienced institutional investors grabbed the opportunity to buy in large stakes. In the current market scenario, many large-cap stocks have witnessed strong liquidation of stakes by retail investors. Here are the top five names that saw a significant reduction in retail shareholding in the last year

Key takeaway

Analysing the shareholding pattern is crucial to understanding the "shareholder psychology" for a behind a stock. While It is not the only indicator, it is one of the most important metric to study before investing in a particular stock. Analysing this data alone won't guarantee any risk-free returns, but it will certainly help to avoid mistakes driven by recency bias.