Domestic investors rejoice as smallcap stocks stage sharp recovery

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26 Aug, 2025 12:21

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The sharp decline in domestic stock market in the first half of 2022 did little to blunt the aggressiveness of Indian investors and their optimism for the domestic economy.

Smallcap stocks, a risky space due to low liquidity levels and susceptibility to price manipulation, remained a preferred destination for bottom-fishing by retail investors and mutual funds alike during the first half of the year despite the crash.

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Since hitting a record high in January, Nifty Smallcap 100 index had crashed 30 percent because of tightening financial conditions triggered by aggressive adopted by global central banks that caused a severe contraction in valuation in the space.

The decline in Indian smallcap stocks was largely in line with global peers, and so has been the rebound.

For domestic investors the sharp drawdown in the smallcap space in the first half of the year was an opportunity to lap up stocks they believed will ultimately benefit from the strength in the domestic Indian economy despite the macroeconomic headwinds, said analysts.

“I believe that currently India’s relative corporate and macro positioning is probably at best levels,” Sami Vartak, founder and chief investment officer at SageOne Investment Managers said in a recent memo.

Domestic retail investors, categorized as individual investors with a capital of less than Rs 2 lakh, raised their stake in 68 out of the 100 stocks part of the Nifty Smallcap 100 index between December 31 and June 30, data available on AceEquity showed.

While less aggressive, domestic mutual funds also used the buy-on-dip strategy when it came to smallcap stocks as they raised their shareholding in 54 out of 100 stocks of the Nifty Smallcap 100 index in the previous two quarters, data showed.

In the meantime, it was foreign portfolio investors who were the major sellers in the smallcap space in-line with their activity in the rest of the market.

Foreign portfolio investors were net sellers of Indian stocks worth more than Rs 2 lakh crore in the first seven months of 2022. No surprise then that FPIs reduced their shareholding in 59 out of 100 stocks part of the smallcap index.

However, since hitting its 52-week low on June 20, the Nifty Smallcap 100 index has risen nearly 19 percent in a spectacular rebound that has bettered the near 16 percent rally in the Russell 2000 index since mid-June.

Outlook Ahead

Domestic asset managers remained buoyed of the prospects for smallcap stocks going ahead driven by their optimism for earnings growth and the resilience of the domestic economy. A Moneycontrol survey of asset managers in July found that fund managers preferred to deploy fresh capital in the smallcap and midcap space over largecap stocks.

The domestic economy is expected to remain one of the fastest growing large economies in the world with an expected growth rate of 7.2 percent, as per the Reserve Bank of India. On the macroeconomic front, the recent decline in global crude oil and other commodity prices is also expected to provide support to profitability of smallcap companies.

“We think a virtuous cycle is underway – with a rise in capex leading to job creation and income growth fueling consumption growth,” Morgan Stanley’s Chief Asia Economist Chetan Ahya said in a recent note.

Stocks in Demand

Individual constituents that saw the biggest demand from retail investors during the six-month period ending June 30 included names like Brightcom Group, HEG, Multi Commodity Exchange, Suzlon Energy and Redington India.

Similarly, stocks that saw the biggest increase in holding by mutual funds included names such as IDFC, MCX, Delta Corp, Avanti Feeds, Prince Pipes and Fittings and TV18 Broadcast.

Of the 100 stocks part of the smallcap index, around 31 stocks were favoured by both mutual funds and retail investors including names such as Hindustan Copper, JK Lakshmi Cement, Bank of Maharashtra and Brightcom Group.Disclosure: MoneyControl is a part of the Network18 group. Network18 is controlled by Independent Media Trust, of which Reliance Industries is the sole beneficiary.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.