Fortune India Boardroom: Why Prashant Jain believes losses for investors this time around will be the highest ever

Resilience can be at times an over-rated virtue especially in a greed-driven stock market.

On one side, there’s Navin Agarwal, group managing director of Motilal Oswal Financial Services (MOFSL), brimming with optimism over the financialisation of savings and an ever-expanding retail investor base. That’s showing up in the way the indices are just off 3% despite foreign portfolio investors pulling out a record $11 billion in 32 sessions since the year began.

On the other hand, Prashant Jain, founder and CIO of 3P Investment Managers and Devina Mehra, founder and chairperson of First Global, seasoned market veterans, are sending out sharp warnings about an impending reckoning.

So, is this a golden era of market democratisation, or are we sleepwalking into the biggest retail-driven bubble yet?

Agarwal is optimistic, and for good reason. The numbers are staggering—India’s demat accounts have soared from 40 million in December 2019 to 190 million by the end of 2024, a near fivefold increase in just five years. "Even in the last quarter of 2024, the growth in demat accounts was around 30%," he pointed out at Fortune India’s recently held Boardroom Discussion series titled, “Investing in a Perfect Storm”.

What’s even more interesting is the convergence of direct stock market participation with systematic investment plans (SIPs) and mutual funds. Broking platforms are cross-selling SIPs, while SIP distributors are nudging investors toward stock trading. This blurring of boundaries between mutual funds and direct equities is leading to longer market participation and higher investor engagement.

"With a $5 trillion stock market capitalization and growing wealth, the demand for wealth management services is rising too. We may see pauses in growth, but over the next 5-10 years, we believe robust retail participation and financialization of savings will continue," Agarwal said, reinforcing his belief in India’s long-term market strength.

But not everyone is convinced.

Jain, a veteran of multiple market cycles, is more circumspect though.

When asked about the wave of first-time investors who have entered the markets post-COVID, Jain didn’t mince words: "They will figure it out very painfully in most cases. No matter what you tell them, they will listen only to their experience of the past few years—and not to anything else."

Jain highlighted a striking fact: 15 crore of the current 19 crore demat accounts did not exist before the pandemic. That means a massive chunk of today’s investors have never seen a real bear market. The danger, according to him, is that these small-cap booms follow a pattern—where everyone makes money except retail investors who hold on to a stock too long.

"Selling shareholders will make money. Investment bankers will make money. Even short-term flippers might make money. But someone eventually has to hold the stock—and that’s where the real pain begins," Jain warned.

Unlike previous bubbles, where only a fraction of retail investors were involved, today’s market has nearly 20 crore demat accounts—a scale India has never seen before.

"I personally feel losses in this round will be the highest ever," Jain cautioned.

Mehra of First Global, too, sees pain ahead.

Her firm has already cut exposure to small caps, despite knowing it might hurt short-term performance. Why? Because small caps have no real risk management.

"Stop losses don’t work in small caps. When these stocks fall, they fall like a stone. And hedging doesn’t help because the only effective hedge is a Nifty Put, which doesn’t move in sync with these stocks," Mehra explained.

She recounted conversations with investors who dismissed her cautious stance.

"People told me, ‘Why are you so conservative? We want high risk for high returns!’ But the only certainty with high risk is high losses—high returns are never guaranteed."

While Agarwal sees long-term structural growth. Jain and Mehra see an unsustainable mania that will end badly for many.

So, who’s right?

If history is any guide, both sides can be correct—but at different points in the cycle. Retail participation is undoubtedly growing, but markets don’t move in straight lines. In other words, the excesses in small caps and IPOs suggest we may be closer to a enduring correction than another leg of a bull run!