In an interview to CNBC-TV18, Nilesh Shah of Kotak Mahindra AMC said that first-time investors need to be very cautious while investing low quality stocks.
Shah said that rally in the market over the last few months has been quite broad-based, but the rally in Z group shares--considered as risky because of poor fundamentals as well as compliance issues--has been the sharpest.
He said it was encouraging to see many first time investors sign up for systemic investment plans with mutual funds, and with online brokerages for trading through the internet. At the same time, Shah said that many of them seemed to be in it for some quick profits.
"At least in this new set of investors there is a probably a set of people who believe 20 paisa stock is better than Rs 2 stock, Rs 2 stock is better than Rs 20 stock and Rs 20 stock is better than Rs 200 stock, and which is why we are seeing Z group shares, penny shares going up.
Certainly, this set of investors need to learn from previous experience of other investors, other traders and they should be careful while dabbling in Z group shares. Trading should be a small percentage of your portfolio. You should be making serious investments even though you are entering for the first time in the market,” he said.
In the US, trading app Robinhood has become a rage to the point that first time investors are now being loosely referred to as 'Robinhoods'. Market experts partly attribute the rally in US shares to this band of investors, who have been bidding up shares of even bankrupt companies like Hertz to unrealistic levels.
It has ended in tragedy for some of these newbies, with a 20-year old trader committing suicide after mistakenly reading his trading statement.
In India too, many online trading platforms have seen a surge in their client base since March.
Experts say that there are signs of some investors discontinuing their SIPs with mutual funds and directly punting on stocks. They are basing their inference on the declining inflows into SIPs since April this year.
SIP inflows in June were less than Rs 8000 crore, the lowest since November 2018. Some market watchers say this could partly be explained by the financial stress in the wake of the COVID pandemic, which would have prompted many to rejig their monthly expenses.
Last week Saurabh Mukherjea of Marcellus Investment Managers warned investors against buying low quality stocks with broken balance sheets. He said that the stocks may look attractive in a rising market, but were only riding a liquidity fuelled rally. The moment liquidity dried up, these stocks would be hit the hardest, he had said.
First Published: IST