Can you really bear the bears?

The market can’t keep going up forever. And when it does enter a prolonged bearish phase, most new investors might be woefully unprepared to handle it.

Markets have been on a steady upward trend since the COVID-19 lows, driven by a combination of loose fiscal policies, liquidity inflows, and historically low interest rates, which fueled a credit binge from 2020 to 2022. This environment has had a significant impact on investor expectations and market dynamics, particularly in the small-cap sector.

The ongoing market rally has resulted in triple-digit returns for many small- and mid-cap stocks. Naturally, such gargantuan returns have attracted a large number of investors, many of whom are motivated by a fear of missing out (FOMO).

This trend is reflected in the surge of new demat accounts in India: as can be seen in the chart below, the number of investor accounts nearly quadrupled between March 2020 and June 2024. Moreover, in September 2024 alone, 44 lakh new demat accounts were created, taking their total number to 17.5 crore. This growth is a sign of the rapid increase in retail participation in the markets.

In addition, small-cap stocks have become the focal point for investors over the past four years, while large-caps have largely been neglected. In fact, for the first time in history, the number of small-cap fund investors has now surpassed that of large-cap fund investors.

However, what’s critical to note is that 75% of new small-cap investors have never experienced a bear market. This raises concerns about their preparedness for potential market downturns.

In India, bear markets have historically been marked by substantial declines. For instance, during the 2008 financial crisis, over a period of 14 months, the Sensex fell by approximately 60% from its peak. More recently, the COVID-19 pandemic triggered a sharp decline in early 2020, with the Sensex dropping by 38% in just a few months.

Investor psychology plays a critical role during bear markets, which is why experience matters. Retail investors motivated primarily by FOMO and looking to make relatively quick gains are more likely to panic-sell and rush to exit positions regardless of the price.

So how many Indian investors will survive the next bear market? And how many will book huge losses and end up becoming wary of the markets? Only time will tell.

For more actionable insights backed by data and analyses, we invite you to read the latest edition of Netra in its entirety.