Small investors cut direct stakes in 52% of India Inc in Q3, but mutual funds cushion the blow

A Mint analysis of shareholding data for 3,497 BSE-listed companies showed that retail investors—individuals holding shares worth up to ₹2 lakh—cut their stakes in 52% of firms in the December quarter. In the previous quarter, they trimmed their holdings in 46% of these firms, a trend that has been building through the year. In December 2024, individuals pruned their stakes in 41.3% of companies while for March 2025 this figure stood at 48.8%.

Consequently, buying momentum is fading. Retail investors increased their holdings in only 40% of companies during the December quarter, a notable decline from 46% in the September quarter and 50% in the December quarter of 2024. For the remaining firms, retail shareholdings remained unchanged quarter-on-quarter in Q3FY26.

Exiting large caps

Their pullback was most pronounced in large-cap stocks. During the December quarter, retail ownership rose in only 33% of large caps and declined in 65%, signalling a clear exit from frontline names. While mid- and small-cap stocks showed slightly more resilience, selling still dominated the narrative. Retail stakes increased in 43% of mid-cap companies and 40% of small caps, failing to keep pace with declines in 56% and 51% of these companies, respectively.

Market experts attributed the shift to stretched valuations and weak returns in the broader market. “When valuations get stretched, reversion to the mean is inevitable. The trigger this time was poor broader market performance in 2025, especially the negative returns in small caps,” said V.K. Vijayakumar, chief investment strategist at Geojit Investments. He added that mid caps stocks could stabilise if earnings recovery continued, as recent results suggest.

Despite the selling, experts cautioned against interpreting the data as a retail exit from equities. “What we are seeing is a change in behaviour, not a retreat,” said Shweta Rajani, head of mutual funds at Anand Rathi Wealth. “Retail investors reduced stakes in about 52% of listed companies, which is a sharp contrast to last year. At the same time, direct retail trading activity also cooled in a very measured way,” she added.

FPIs remain cautious

Foreign investors were cautious, too, pruned their stakes in nearly 40% of the companies, compared to around 37% in the September quarter. They increased their ownership in only 33% of the listed universe.

This pullback was most visible in large- and mid-cap stocks. In large caps, FPIs sequentially increased their stakes in 39% of companies but reduced them in 60%. Mid caps reflected a similar pattern, with increases in 39% of firms and declines in 57%. Small caps were relatively less affected, though selling still outweighed buying.

Vijayakumar said, “FPIs buying is likely to look up from now on. The trade deals with EU and US and the fiscally prudent, growth-oriented Budget have brightened the scope for an earnings recovery in FY27. The momentum in the economy and earnings growth, the reasonable valuations and concerns about overexposure to US equity in the context of an emerging AI bubble might nudge FPIs to turn buyers in India.”

Mutual funds cushion market

Mutual funds inflows continued to provide steady support in the December quarter, though the pace of buying moderated further. Mutual funds’ stakes rose sequentially in 12% of companies, while holdings fell in 9.3%. These domestic institutions had increased their stakes in around 13% of firms in the previous quarter, and in 13.7% in the December quarter of 2024. Purchases remained concentrated in large- and mid-cap stocks, with limited exposure to small-caps, revealing a preference for liquidity and strong balance sheets.

With domestic capital still flowing in, the consensus among experts is that retail investors are changing strategies rather than shunning equities. Rajani said, “If this were genuine fatigue, money would have left the market, but that hasn’t happened. Instead, many investors who entered equities after covid are now shifting incremental savings from direct stocks to mutual funds, shaped by steady long-term returns. The signal is clear in the numbers: SIP inflows touched about ₹31,000 crore in December 2025, and DII inflows were nearly ₹7.9 trillion. Put together, this shows retail participation has not weakened. It has simply become more disciplined and long-term, which is a sign of a maturing market.”

This steady domestic support helped limit market volatility. “Even during phases of strong foreign selling, markets have remained relatively stable because domestic institutional flows have absorbed the pressure,” Rajani added. With mutual funds now owning about 10.9% of the market, domestic liquidity has emerged as a key stabilising force.