Geojit's Vinod Nair expects domestic fund inflows to boost small-cap and mid-cap stocks — Here's why
Domestic Institutional Investors (DIIs), led by mutual funds, have emerged as a key pillar of strength for the Indian equity market. YTD, DIIs have infused more than net ₹ 3.5 lakh crore, while FIIs are sellers with ₹ 85,000 crore. A major upside in DII traction has been noticed since May as the domestic economy started to rebound, with an upside in Q4 corporate earnings results.
Meanwhile, the strength of Retail Investors, whose role in the stock market had expanded since 2020, has moderated during the year. The slowdown is after being a key investor in the calendar year of 2024. Based on NSE data, they accounted for about ~20% of the total net inflow in India. They have been in a profit booking mode since March and continue to do so by the middle of this month, June.
The primary driver behind the recent wave of profit booking among investors in that CY2025 has heightened market volatility. Mid and Small caps are on the taking side due to the rapid downgrade in domestic earnings in FY25. Also, due to an above-average liquidity influx in CY2024, believed to be about a total net inflow of ₹ 7 lakh crore from FIIs, DIIs and Retail, the premium valuation of Tier 2 stocks breached the historic trend. This overvaluation led to a broad market correction when earnings downgrade, resulting in losses for newer investors and dampening retail player's confidence.
Hence, today, the retail investors are in the revision of their equity portfolio, as indicated by the maintenance of the high amount of gross total turnover and volatility in the bourse. The retail players continue to play for the long-term investment with the sustenance of the high monthly SIP inflows. Notably, during the latter part of June, there has been a visible uptick in retail investment activity, marking a recovery in sentiment following nearly three months of subdued engagement.
We can expect the traction from DIIs and Retail to continue as global tension has reduced, a key characteristic observed by retail investors. This optimism is further reinforced by the Reserve Bank of India's supportive monetary stance and the government's fiscal initiatives, which are beginning to positively impact the real economy. The 2026 fiscal year Q1 result is to be announced soon in the next 2 weeks, which has high expectations. The environment is optimistic that it may lead to an upgrade in future earnings.
The improved domestic inflows are expected to boost Mid & Small-cap in the future. Nifty 50, which was trading in a narrow band of 24,500 to 25,250 in the last 1 ½ months, has crossed above 25,500, a crucial base. This is led by a reduction in global risk and in anticipation of improvement in FY26 earnings and finalisation of a bilateral trade agreement with the U.S.
The traction of the broad market can expand in the future if earnings indicate positivity. Though the market has breached a new zone, the level of momentum of the broad market continues to be subdued compared to last year's parameters. Like the percentage of stocks trading above the 200-days moving average was as high as more than 80% last September 2024, which today stands at only 55% based on Nifty 500 index data. A indication that the market can attract more traction.
The author, Vinod Nair, is Head of Research at Geojit Financial Services.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making investment decisions.
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