Small investors have reduced their direct equity holdings in a significant portion of India Inc during the third quarter (Q3) of the current fiscal year. Data indicates that retail investors cut their stakes in 52% of NSE-listed companies. However, the continuous inflow of domestic capital through mutual fund Systematic Investment Plans (SIPs) has softened the impact of this reduction.
Market experts suggest that this shift does not indicate that retail investors are exiting the equity market altogether. Instead, many appear to be modifying their investment strategies. One potential reason for this is the sharp correction observed in small and midcap (SMID) stocks. Individual investors typically have greater exposure to these segments, making them more susceptible to losses during such corrections. G Chokkalingam, founder of Equinomics, noted that SMID stocks have corrected significantly, with some falling between 20% and 50%. He also pointed out that the share of the top 250 stocks in overall market capitalization has increased sharply, while SMID stocks have experienced steeper erosion.
An analysis of nearly 505 small-cap companies reveals that retail investors have steadily decreased their stakes for three consecutive quarters in FY26 across 68 small-cap stocks. Interestingly, more than half of these stocks have delivered double-digit returns in FY26, even with declining retail participation. This raises the question of whether retail investors are engaging in profit-booking after a strong rally or prematurely stepping aside and missing potential future gains.
High net-worth individuals (HNIs), defined as those holding more than ₹2 lakh worth of shares in a single company, also reduced their positions, with their share declining from 2.09% in Q2 to 2.03% in Q3. Consequently, the combined ownership of retail and HNI investors has fallen to a three-year low of 9.28%.
While direct individual ownership has weakened, domestic institutional investors (DIIs) have strengthened their dominance. DII holdings rose to an all-time high of 18.72%, up from 18.28% as of September 30, 2025, supported by net investments of ₹2.1 trillion during the quarter. This increase was primarily driven by domestic mutual funds (MFs), whose ownership climbed to a record 11.1%. Fueled by steady retail inflows via SIPs, MFs invested a net ₹1.1 trillion during the quarter.
In contrast to DIIs, foreign portfolio investors (FPIs) saw their share fall to a 13-year low of 16.6% in Q3 amid sustained selling pressure. Despite this, they emerged as the most effective allocators among investor categories, with the average share price of FPI-owned stocks rising 7.1% during the quarter, followed by domestic institutions at 2.4%.
Overall, the Nifty is currently only 1.8% away from its January 2026 closing highs, while the Nifty Small Cap index is 11.6% away. The broader market's struggles led retail investors to become net sellers worth ₹1,714 crore in 2025, a stark contrast to net buying of ₹1.67 trillion in 2024. Retail investors were net sellers in seven out of twelve months last year.
Despite the overall negative sentiment from FIIs, they increased their stakes in select stocks during the October-December quarter. This suggests that factors beyond regular business numbers, such as a strong order book, long-term revenue visibility, and future growth prospects, are influencing FII investment decisions.