Over the past almost two years there has been a flight to small cap stocks, evidenced by rising shareholdings in such stocks by retail investors and mutual funds, partly due to increasing inflows into small cap funds and partly due to restrictions on derivatives trading .
According to HDFC Securities, retail equity holdings in Nifty smallcap 100 stocks rose 16 percent at the end of September 2024 from 15.4 percent at the end of March 2023. During the same period, mutual fund holdings in smallcap stocks rose 10.9 percent from 10.1 percent. Interestingly, the holdings of foreign portfolio investors fell by 15 percent from 15.3 percent.
The Niftysmallcap100 index has risen by more than 27 percent in a year.
The trend towards small cap stocks has been partly fueled by heavy inflows into small cap mutual funds, explains Deepak Jasani, Head of Retail Research at HDFC Securities. Mutual funds have to invest the money that goes into such schemes. Small-cap funds even experienced the largest monthly inflow of the past thirteen months in November 2024.
According to AMFI data, ₹4,112 crore flowed into smallcap schemes in November, up 9 per cent month-on-month.
Another aspect of the flight to small cap stocks is due to the shift in trading volumes from index derivatives to the small cap money market, according to Yes Securities. To safeguard the interests of investors and speculative trades in index derivatives, Sebi has increased the minimum contract size and made upfront collection of option premiums mandatory.
“We feel investors are increasingly focused on small-cap opportunities given the broader price resilience of these stocks compared to their large- and mid-cap counterparts over the past three months,” the report said.
Within the small cap segment, the sectors driving cash market volumes are automotive, capital goods, diversified real estate and real estate. “These sectors have shown renewed momentum, attracting investor participation and benefiting from the broader market’s shift towards smaller stocks,” Yes Securities said.
