Why false certainty is turning out to be a costly belief for retail investors

Sometimes the answers to even unasked questions can come from the most unexpected of sources. That was the case here. The term false certainty is something that encapsulates what seems to be happening in the Indian stock market right now.

In the last five years, a slew of retail investors have bought stocks, directly and indirectly. As of January 31, 2025, the total number of demat accounts in existence stood at 18.8 crore. Close to 80% of these demat accounts or four in five, have been opened only post-March 2020, after the pandemic started.

When it comes to mutual funds, the total money flowing in through the systematic investment plans (SIPs) has gone up dramatically. In 2019-20, it stood at ₹1,00,084 crore. In 2024-25, as of January 31 2025, it is at ₹2,37,427 crore, with two months data still left to come. It is estimated that 90% of the money invested into mutual funds through the SIP route is invested in equity mutual funds, which is, in turn, largely invested in Indian stocks.

This flood of money coming in through the retail route led to two false certainties.

The FIIs have sold stocks worth ₹2.05 lakh crore or $24 billion since October 2024. In fact, as far as FIIs are concerned, their holdings of Indian stocks peaked on September 30 2024 at $930.5 billion. This is about the time when the broader stock market peaked as well. As of January 31, the value of these holdings were down by around 16% to $782.1 billion. At a general level, this is the major reason behind stock prices falling after peaking in late October.

Indeed, the FIIs have always been an important part of the Indian stock market and they will continue to be so, and any continuous selling (or buying for that matter) is bound to eventually have an impact on stock prices.

As mentioned earlier, four in five retail investors have opened a demat account only post-March 2020, and in their limited experience, they have seen the stock market only go up. The lack of experience of fund managers managing money invested by retail investors has also come to the fore. Like investors, they have never seen a sustained fall in stock prices.

In the bounded rationalities of their minds, the false certainty that the stock market will only keep going up led to many retail investors and fund managers betting on narrativised sectors and small and midcap stocks. These stocks have fallen by far the most.

Take the case of the BSE Sensex, which is made up of large-cap stocks. As of February 17 2025, it had fallen by around 12% from its peak. In comparison, the BSE SmallCap Index, which is made up of small-cap stocks, has fallen by 22% from its peak. The BSE PSU Index has fallen by 28% from its peak. The public sector companies have been a highly narrativised sector in this market cycle.

So, the belief that stock prices will only keep going up turned out to be a false certainty and has cost many retail investors dearly.

There are other points that need to be made.

The only difference this time was that financial influencers used social media massively to promote false certainty. In the process, many more investors ended up with this belief than was the case anytime previously.

Of course, those in the business of selling stories (read finfluencers) are now talking about the beauty of investing in gold, after gold prices have already run up quite a bit.

Indeed, all diversification comes at a cost and is psychologically very difficult to implement. Anyone who has held on to some cash – not literally but in the form of bank deposits, investments in liquid funds etc., in the last few years – and seen his friends do well by investing all their money in stocks and equity mutual funds, must have gone through a difficult time mentally. And it would have taken a lot of conviction and focus to keep doing what they were doing.

But right now, they are the ones who are sleeping well because they had the courage of their doubts. And that is what matters the most at the end of the day.