In the midst of India’s stock market boom, foreign investors focus on small and mid-cap companies

Amidst the market’s euphoria, international investors are shifting their focus towards small and mid-cap firms in India’s dynamic stock market, hoping to find prospects for strong returns.

The number of companies with above 10% abroad holdings on the BSE 500 Index increased to 275 as of December-end, a notable rise from 257 a year earlier, according to a recent Bloomberg study of foreign institutional ownership data. It is noteworthy that smaller businesses are mostly driving this development, suggesting a change in emphasis towards unrealized potential.

Over the last year, the small and mid-cap section of the Indian stock market has posted an astounding 60% return, outperforming the performance of its bigger counterparts by 23%. This is due to the category’s unwavering surge. This pattern shows that global funds are becoming more eager to investigate chances lower on the market-cap hierarchy.

Strong fundamentals support this fervor. According to research by Nuvama Institutional Equities, profits for small and mid-cap businesses increased by 29% in the most recent quarter, almost twice the growth rate seen in big caps. Societe Generale’s Asia equities analyst, Rajat Agarwal, highlights the significance of smaller businesses in identifying developing topics like electric cars and cutting-edge technology, which are sometimes lacking in large-cap firms.

With over 10% of the firms in question being held by foreign investors, Kaynes Technology India, KFin Technologies, and Home First Finance Co., India are among the ones drawing the most attention. This is a deliberate move away from conventional market leaders and toward diversification and the search for exciting growth opportunities.

Investors are being drawn in by the increase in turnover in Indian shares, which hit a record high last month. Smaller companies are attracting more trading activity than bigger ones. Agarwal emphasizes how important liquidity is to overseas investors and says that the selection of equities that fit their requirements has grown as a result of the recent market success.

It is noteworthy, therefore, that while foreign investors are moving more and more toward smaller businesses, their stakes in India’s largest corporations still exceed those in the smaller brands. Concerns about overzealous speculation in small-cap stocks have prompted the country’s market regulator to order mutual funds to take precautions against investor harm.

Despite regulatory cautions, the overall foreign ownership of mid-cap stocks rose to 17% as of December from 14% a year earlier, according to ICICI Securities. In a similar vein, their holding in small caps increased from 8% to 9% as a result of significant inflows into IT, financial, and industrial companies.

DSP Asset Managers analyst Souvik Saha emphasizes the importance of small and mid-cap equities in encapsulating the heart of India’s economic narrative. These businesses will profit from growing per capita income, economic formalization, and higher levels of discretionary expenditure, indicating a sustained positive outlook for the small-cap market.

A strategy move towards unexplored prospects and developing themes in India’s burgeoning stock market is reflected in foreign investors’ growing interest in small and mid-cap firms. The appeal of strong returns and encouraging growth potential is anticipated to maintain the small-cap segment’s momentum for the foreseeable future, notwithstanding regulatory worries.