Foreign Investors Shift Focus: Selling Blue-Chips, Buying PSU and Small-Cap Stocks:

Global investors have begun to cut their exposure to large-cap stocks, whilst stealthily increasing their investments in public sector units (PSUs) and small-cap firms. This change reflects a strategy that retail investors have utilized successfully for some time now.

Q1 2025: FII Inflows into PSUs and Microcaps

In Q1 2025, 79 listed PSUs reported their shareholding patterns. Of these, 52% experienced an increase in FII participation. Likewise, out of 186 Nifty Microcap 250 companies that were reporting, 51% witnessed an increase in FII participation.

Wider Market See Increased FII Activity

FII focus was not limited to PSUs and microcaps. Other data showed that 43% of 107 BSE MidCap companies increased foreign investments, in addition to 42% of 730 BSE SmallCap stocks for the last quarter.

Falling valuations reknewed FII interest

Market analysts are of the opinion that PSUs and small-cap stocks have become more attractive following the recent market corrections. It has been observed that during periods of these low valuations, institutional investors tend to increase their investments. This seems to be the case with the current scenario, which drives interest based on valuations.

Mid and Small-Caps Offer Alpha Potential

Due to their growth prospects—both mid and small-cap stocks tend to attract more aggressive foreign institutional investors compared to large caps. Investors’ concerns regarding revenues and margins might be more short-term in nature, while their domestic businesses are more insulated due to their business model.

Averaging Down in PSU Stocks

Certain PSU stocks have declined over 50% from their 52 week highs. This may be an opportunity for foreign institutional investors to average down as they are likely to find better value at these prices.

Sharp Exit from Large-Caps in Q1 2025

Out of 36 Nifty50 companies that came out with the March quarter numbers, only 5 showed an increase in FII holding. Out of the 73 Nifty100 companies, 53% of them saw a reduction in FII stake, which is quite alarming. Over ownership and concerns over global trade do remain pull back reasons.

Markets Performance Reflects Shift

In the last quarter alone, FIIs offloaded Indian equities worth more than 1.16 lakh crore. Consequently, the nifty index also fell by 0.5% while the nifty100 plunged 1.8%. Further the BSE midcap and small cap indices also tumbled by over 11% and 15%.

Alignment Between Investors And Retail Investors

Ajay Bagga, the financial analyst, called it a dual strategy: FIIs are simultaneously defending positions with domestic plays and scouting for high-growth opportunities in less-travelled stocks. This unusual alignment of retail with foreign investor strategies highlights the prevailing attitude of investors in Indian markets.