In a surprising turn during the March 2025 quarter, foreign institutional investors (FIIs) made a silent but strategic shift in their investment pattern. While large-cap stocks witnessed consistent selling pressure, FIIs were quietly accumulating shares in public sector undertakings (PSUs), small-cap, and micro-cap stocks.
This unexpected move comes at a time when retail investors had already been betting on smaller and undervalued stocks — and now it seems FIIs are following suit.
FIIs Cut Down on Large-Caps
As of March 31, 2025, 36 out of the Nifty50 companies have shared their latest shareholding data. Out of these, FIIs increased their holdings in just five, while reducing their exposure in the remaining. A similar trend played out in the broader Nifty100 universe, where more than half of the stocks saw a fall in FII ownership.
Large-caps seem to have lost their shine, mainly due to concerns like over-ownership, global trade tensions, and uncertainties that impact future earnings visibility. These risks have prompted FIIs to trim their exposure in top-tier companies, analysts noted.
PSU Stocks Back in the Spotlight
Interestingly, FIIs raised their stake in 52% of 79 PSU companies that have reported their March quarter data. This shows renewed confidence in the public sector, despite past volatility. Many of these stocks had corrected significantly—some by more than 50% from their 52-week highs—making them attractive for value investors.
According to analysts, this could be a case of FIIs averaging down their earlier positions to take advantage of lower valuations. When stock prices dip while the business fundamentals remain intact, it presents a compelling buying opportunity — and FIIs appear to be acting on it.
Micro, Mid, and Small-Caps See Strong FII Action
FIIs also showed interest in smaller stocks, especially those listed on broader indices:
51% of the 186 companies from the Nifty Microcap 250 Index saw an increase in FII holdings.
43% of BSE MidCap stocks and 42% of BSE SmallCap companies also reported higher foreign investor interest.
These segments, often seen as riskier, are favored by FIIs seeking alpha — or better-than-benchmark returns — in the Indian markets. Despite near-term concerns over revenues and margins, many mid and small-cap companies are more domestically driven and less exposed to global uncertainties, making them resilient in current times.
A Twin Strategy at Play
Independent analyst Ajay Bagga summed it up well — FIIs are deploying a twin strategy: defensively investing in domestic-focused companies like PSUs while also chasing alpha in lesser-known mid and small-cap stocks. It’s a rare situation where domestic retail investors and foreign players are aligned, both flocking to the same segments in hopes of strong long-term gains.
During the quarter, FIIs offloaded over ₹1.16 lakh crore worth of Indian equities, leading to minor declines in large indices like the Nifty (-0.5%) and Nifty100 (-1.8%). However, the BSE MidCap and SmallCap indices corrected more sharply, falling over 11% and 15% respectively — and FIIs saw this as an opportunity rather than a risk.
