Large-caps gain favour as retail investors retreat from mid-, small-cap stocks

Retail investors continue to increase their presence in the micro-cap space.

Retail shareholders have trimmed their holdings in mid- and small-caps, bringing their ownership to a nine-quarter low amid a broader market sell-off during the March 2025 quarter. However, during this time, the allocation towards large-caps has increased, suggesting a stronger preference for the safety of blue-chips during market turbulence.

Individual investors, who put their money into the capital markets directly, saw their ownership in the total market fall by 30 basis points on a sequential basis, to a seven quarter low at 9.5 percent, according to an NSE report titled ‘India Ownership Tracker’.

The report added that net outflows of around Rs 15,300 crore in March 2025 were the highest ever monthly outflows by individuals from the NSE’s cash markets. “While their holding in the Nifty 50 universe remained steady at 7.9 percent, that in the Nifty 500 dipped by 14 bps QoQ to a nine-quarter low of 8.6 percent, reflecting the impact of relative underperformance of mid- and small-cap companies during the quarter.”

During the quarter, retail investors had a higher allocation towards blue-chip, large-cap companies, finding comfort in the relative safety of equity giants. Individual investors saw a sharp 3.3 percentage point rise in the share of Nifty 50 stocks in their portfolio.

“This shift largely reflects the relative outperformance of large-cap stocks during the quarter. However, unlike institutional investors, individual allocations to Nifty 50 remain well below the index’s 45.9 percent share in overall market capitalisation,” noted the NSE.

Since the COVID-19 pandemic, individual investors have piled into mid- and small-cap stocks, placing large bets in hopes for outsized returns. Their exposure to Nifty 50 stocks has fallen from highs of 54.5 percent to December FY25 lows, before partially recovering in Q4FY25, mirroring the strong multi-year outperformance of broader market segments, noted the exchange.

“At the same time, retail investors have continued to have a presence in the micro-cap space. As of March 2025, their share in the total/free-float market cap of companies outside the Nifty 500 rose by 1.0 percent point to 19.3 percent, with a sharper 1.7 percentage point increase in free-float ownership to 44.2 percent,” stated the NSE report.

In fact, not just retail investors, but investors across all categories hiked their allocations to large-cap stocks, which marked the first such increase in four quarters, amid heightened market uncertainty.

What type of stocks should investors bet on for the next leg of gains?

According to Vinod Nair, Head of Research, Geojit Investments, the midcap and smallcap segments are well-positioned to lead the next leg of market gains. “After a period of underperformance driven by stretched valuations and consolidation over the past 6–7 months, these segments are now showing signs of strength.”

Further, the recent outperformance is supported by attractive valuations, with many stocks trading at deep value levels post-correction and a stronger-than-expected earnings show across companies.

“Given these factors, the current momentum in mid and small caps appears to be more than just a short-term trend and could mark the beginning of a sustained phase of outperformance with reduction in risk - reward ratio,” he added.

On the flip side, Shrikant Chouhan, Head Equity Research, Kotak Securities suggested that an investor’s focus should be in large-caps with select presence in mid-cap and small-cap. “In the banking space, we find value in the larger names. For the mid-cap and small-cap, the approach should be stock-specific with focus on growth and valuation matrix.”

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.