Analyzing the Impact of Retail Investors on Indian Markets

Retail investors have increasingly become a crucial force in the Indian stock market, with this trend intensifying over the past decade. Although their direct participation has seen only a slight rise—from approximately 8% in 2015 to 9% in 2024—the indirect route through mutual funds has significantly benefited from this increase in retail involvement.

Domestic Institutional Investors (DIIs), managing a large portion of this capital, have expanded their market share from 11% to 15% during the same period, propelling institutional investment levels to heights not seen since 2001. This shift toward institutional investment is noteworthy, as it reflects retail investors’ preference for professional management, signaling a cautious yet dedicated approach. Instead of diving directly into equities, retail investors are opting to trust their capital to DIIs, which allocate funds across a variety of sectors and companies.

The collective strength of these investors has enabled DIIs to build extensive holdings across a wider range of companies, especially in both large-cap and non-large-cap stocks. Notably, the percentage of stocks where DIIs hold more than 20% has increased significantly, rising from 6% in 2015 to almost 20% in 2024.

In comparison, Foreign Institutional Investors (FIIs) have experienced a decline in their share of Indian equities, dropping from 21% to 18% over the same timeframe, underscoring the rising importance of domestic investment. This trend has contributed to a more resilient Indian market, safeguarding it against external shocks that previously had a more significant impact due to the predominant role of FIIs.

The sectoral preferences of retail investors have changed considerably since 2020. They have decreased their investments in traditionally defensive sectors, such as consumer staples, healthcare, and real estate, while increasing their stakes in technology, utilities, and telecommunications. Additionally, retail portfolios demonstrate a strong inclination toward small-cap stocks, contrasting with the large-cap focus typical of institutional investors.

This preference for smaller, more volatile companies indicates a level of risk tolerance that challenges the stereotype of retail investors as mainly short-term traders. In fact, analysis shows that retail investors tend to hold onto their investments for longer periods than either DIIs or FIIs, with about 82% of retail portfolios experiencing minimal turnover over a four-year span.

Despite fluctuations in their holdings, retail investors have achieved impressive performance since 2016. Analysts report that retail investors have outperformed both DIIs and FIIs, achieving a 1.8% annual outperformance against the market, in contrast to DIIs’ 0.25% and FIIs’ -1.5% underperformance. This success may be attributed to the contrarian tendencies of retail investors, who often buy when institutional investors are offloading their assets.

For example, stocks that saw a decline in both DII and FII ownership between 2016 and 2019 delivered strong forward returns, a trend that continued to strengthen from 2019 to 2024, yielding average one-year forward returns of 47%.

The growing impact of retail investors in India’s stock market reflects their increasing sophistication and their ability to shape future market dynamics. With their preference for small caps, readiness to adopt riskier strategies, and superior performance compared to institutional players, retail investors have transformed from marginal players to central figures in India’s financial landscape. While DIIs have long been influential, retail investors are now emerging as a dynamic and vital component in the ongoing evolution of the Indian stock market.