Retail investors dump 68% of Nifty stocks chasing smallcap crorepati dreams. Is this a trap?

Time of India

a day ago

Indian retail investors are selling their holdings in Nifty50 companies. They are seeking higher returns in small and mid-cap stocks. This trend is driven by impatience and the desire for quick profits. Experts warn against this strategy. They cite risks like volatility and poor governance. Institutional investors are buying the bluechip stocks that retail investors are selling.
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What's the psychology behind the sell-off?
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The smallcap gamble
The experts highlight a minefield of specific, often overlooked, dangers:
Crippling Volatility and Liquidity Traps: "Smallcaps are inherently more volatile than largecaps, with lower liquidity and higher sensitivity to market or economic shocks," explains Karthick Jonagadla. This means portfolios can "magnify portfolio swings and potential losses." Sheth adds a critical point about exit strategy: "Smallcaps can be hard to exit in downturns. If there's a market correction or panic, these stocks fall harder and faster—and may not recover as easily."
Questionable Quality and Governance: The mad dash for returns often means due diligence is ignored. "Many small and midcap companies may lack the transparency, consistent performance, and robust governance standards that bluechip stocks maintain," Jonagadla warns. "Retail investors chasing rallies often ignore these critical qualitative factors."
The Peril of Herding and Stretched Valuations: When everyone rushes into the same few stocks, it creates a bubble. "As more retail investors crowd into the same set of smallcaps, these stocks can become highly overvalued, exacerbating the risk of a sharp correction when sentiment reverses," says Jonagadla. Sheth confirms that many of these stocks are now trading at "stretched valuations, without matching earnings support," exposing investors to severe valuation compression risk.
In a high-stakes gamble for explosive returns, a vast army of retail investors has systematically shedded its holdings in India's most formidable bluechip companies. Driven by a potent cocktail of impatience, profit-booking, and the intoxicating allure of finding the next multibagger , they are abandoning the perceived safety of Nifty50 stock to chase the "crorepati" dream in the volatile, high-octane world of small and mid-cap stocks.The numbers from the June 2025 quarter show that retail investors have pared stakes in 34 of 50 companies constituting the Nifty index, which means 3 out of every 4th bluechip stock saw small investors taking a bearish stance.The move is made all the more dramatic by the fact that many of these discarded giants have been stellar performers. Investors have been selling shares in companies like Bajaj Finance, which has rocketed 28.5% year-to-date, and defence stalwart BEL, up an impressive 29%. This paradox suggests a conscious, aggressive strategy: cash in the steady gains from the giants and redeploy the winnings onto the riskier, but potentially more rewarding, terrain of the broader market.What is driving millions of investors to collectively turn their backs on stability? Market experts point to a confluence of powerful behavioral triggers.Apurva Sheth , Head of Market Perspectives & Research at SAMCO Securities , identifies a core sentiment of frustration. "Looking at the investment behaviour of the retail investors in the recent past, it seems that they are fed up with the ongoing consolidation in the largecap stocks," he observes, adding that this phase of sideways movement has been "unduly prolonged." For investors seeing small-caps deliver triple-digit returns elsewhere, the steady, single-digit churn of a largecap leader can feel like stagnation.This impatience is fertile ground for the fear of missing out, or FOMO. Karthick Jonagadla , Founder of Quantace Research, says retail investors may be exiting bluechip Nifty stocks in favor of smallcap and midcap names, hoping to capture outsized gains in those segments.'The outperformance of these lesser-valued segments in previous cycles can generate a fear of missing out (FOMO), often leading retail participation to surge in already rallying stocks,' he explains.Sheth concurs, noting, "Retail tends to follow trends, and the recent outperformance of broader markets may have created a FOMO effect. Stocks that already ran up are being assumed to continue that momentum."For many, the decision is also tactical. Anand K Rathi, Co-Founder of MIRA Money, sees this as a "classic case of profit booking." He elaborates that it's a "common behavioral pattern where investors—retail or HNIs—tend to exit well-performing bluechip stocks to preserve gains and rotate capital into areas they believe have higher near-term upside or appear undervalued."However, Rathi issues a stern warning against this seemingly savvy move. "Investors frequently lose out on long-term wealth building while using this strategy," he cautions. "They enter risky equities without considering fundamentals and sell winners too soon, only to see their earlier holdings grow even more. Such reactionary investing, motivated more by short-term stories than by long-term convictions, may backfire."The exodus of retail investors has created a fascinating divergence when contrasted with the behavior of institutional "smart money." While retail sold, mutual funds increased their holdings in 33 Nifty companies, and foreign institutional investors (FIIs) were net buyers in 21.The schism is starkly visible at the individual stock level. In IndusInd Bank, retail investors shed a significant 1.10% of their holdings. In the same period, FIIs saw a buying opportunity, aggressively increasing their stake by a massive 4.16%. A similar story played out in BEL, where a 0.72% retail exit was met with a 1.01% FII entry.This institutional conviction suggests a fundamentally different thesis. While retail chases short-term momentum, institutions appear to be capitalizing on the availability of high-quality assets, perhaps seeing long-term value where retail sees limited near-term upside. Jonagadla notes that some retail investors may be selling because they believe "further upside is now limited" in Nifty stocks that have already run up.However, Apurva Sheth offers another layer of nuance. The decline in direct share ownership might not be a complete abandonment of blue-chips. "Some of the reduced direct ownership in largecaps may also be explained by a shift to SIPs and mutual fund investing," he suggests. "Retail may prefer managed portfolios, especially in volatile markets, leading to declining individual holdings even in top-quality names."While the chase for multibaggers is exhilarating, market veterans are nearly unanimous in their warnings about the dangers of this strategy. They describe it as "classic late-cycle optimism" and a gamble that exchanges stability for fragility."This is a serious risk during bullish times," states Anand K Rathi. "It may seem profitable to sell largecaps with solid fundamentals and reallocate a significant portion to smallcaps but doing so exposes investors to high volatility and concentration risk."Apurva Sheth echoes this sentiment, emphasizing the danger for the average investor. "It's a significant risk, especially for inexperienced or emotionally driven investors," he says. "By exiting diversified bluechips (like RIL, HDFC Bank), retail is exchanging stability for fragility."Perhaps the most significant risk is the abandonment of a proven wealth-creation strategy. "Historical returns demonstrate that a core allocation to quality bluechip stocks underpins long-term wealth creation," reminds Jonagadla. "Sudden portfolio shifts based on short-term momentum can compromise overall diversification, making portfolios riskier than what retail investors may realize."Anand K Rathi stresses that this behavior can be self-destructive. "From the perspective of portfolio construction, these tactics have the potential to sabotage long-term objectives," he says. The very act of selling a steady compounder to buy a speculative asset can be the costliest mistake an investor makes.As Anand K Rathi aptly concludes, investors should build their portfolios with a clear principle in mind: "Balance, not blind rotation is the key.": Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)