Small investors swap stocks for luxuries

After cashing out of the recent stock market rally, investors aren't ploughing their money into just initial public offerings (IPOs), bonds or real estate. The feel-good factor has prompted many of them to splurge on luxury cars, exclusive holidays and designer brands.

Sample this: luxury car manufacturers BMW, Mercedes and Audi have seen a significant increase in sales in the second quarter, according to Society of Indian Automobile Manufacturers data. BMW doubled sales to 1,701 cars in the previous quarter, while Mercedes and Audi reported 70 and 60 per cent sales increases, respectively.

"The stock market is a major enabler for pushing sales," said Debashish Mitra, head of sales & marketing at Mercedes-Benz in India. The company recently introduced the R Class, priced at Rs 60 lakh, thanks to upbeat buyer sentiment.

"Luxury products are driven by a penchant for exciting products. Companies need products that meet buyers' fancy when they have funds. Else, they will reinvest the funds," Mitra explained.

One of the country's top travel operators said the industry had witnessed better growth in luxury travel than group travel in the last quarter. "Group travel bookings grew a mere 7 per cent, whereas luxury travel bookings posted 12 per cent growth," said an official with the tour operator. A luxury package to Europe costs a minimum of Rs 12 lakh a person, six times the price of a group tour.

Genesis Luxury, a high-end retailer that markets brands such as Satya Paul, Canali and Jimmy Choo, has also seen around 40 per cent growth in the past quarter, according to Managing Director Sanjay Kapoor.

Rajesh Chakrabarti, assistant professor of finance at Indian School of Business, explained: "After such profit bookings, investors tend to use the money for consumption. In volatile or uncertain market conditions, many investors even give consumption priority, as the value of money can erode on correction."

That's precisely why Delhi-based lawyer Anirudh Bobde swapped his Octavia car for an Audi, using the windfall from selling shares as down payment. "I could have done an all-cash deal at an over Rs 2-lakh discount. However, I need the money to change the interiors of the house and a family visit to the US. The vacation has been pending for the past two years," said Bobde.

Mumbai-based small investor Srinivas Deo redeemed his mutual funds to foreclose his housing loan. "I am planning to buy a bigger second house in the same locality (Thane). It will be a safe investment, as real estate prices in Mumbai rarely go down," said Deo.

These are just two among many, who sold their equity investments when the Sensex breached the 20,000-level last month. In equity mutual funds alone, investors redeemed Rs 7,011 crore in September. Since the beginning of the financial year, individuals have sold over Rs 25,000 crore worth of shares and mutual funds, according to data from Association of Mutual Funds of India and stock exchanges.

These investors are now looking to build hard assets. "Investors who cashed out in the current rally are looking to invest a portion of their funds in asset classes such as real estate and gold, for the potential upside," said Amitava Neogi, executive director at Morgan Stanley Private Wealth Management.

When markets neared the all-time high, several investors exited, reversing the losses incurred during the correction of 2008. "Many of these investors are looking at safe and conservative investments," said Mohit Batra, group CEO at Alchemy Capital Management.

Response to the Rs 1,000-crore State Bank of India (SBI) bond issue bears out Batra's views. On the very first day, investors were ready to pour in Rs 17,000 crore.

This was a second feat for SBI. "When equity investors cashed out last month, we saw inflows of Rs 6,000 crore in a single product -- the 555-day term deposit -- in about a month," said a senior SBI representative. He also admitted that the 7.50 per cent offered on the deposit was attractive enough to warrant such attention.

Puneet Matta, head of wealth management at Credit Suisse, felt wealthy investors have been holding on to cash to invest in public offerings of government companies Coal India, IOC and ONGC.

Retail investors were in a frenzy to subscribe to the Coal India IPO this month. The company collected over Rs 27,500 crore from individuals, if you consider everyone applied at the lower price band. At the upper end, the company collected almost Rs 30,000 crore.

However, funds may not return to the secondary market anytime soon. "Unless there is a clear upside trend on the stock market, investors will stay away," said Chakrabarti.