FIIs Reduce Large-Cap Exposure, Turn Bullish on Mid- and Small-Caps Amid Market Rotation

FIIs Trim Large-Cap Exposure, Increase Bets on Mid- and Small-Cap Stocks

Foreign Institutional Investors (FIIs) have continued to rebalance their India portfolios in 2025, trimming exposure to large-cap stocks while expanding their presence in the mid-cap and small-cap segments. This selective market rotation highlights a shifting risk appetite as global uncertainty prompts FIIs to seek new value opportunities in broader market themes.

According to a report by Elara Capital, FII exposure to the Nifty 50 index dropped to 25.5% by September 2025, from a peak of 28.3% in FY21. However, participation in mid-cap and small-cap stocks surged to 16.1% and 14.2%, respectively — signaling a growing investor preference for diversified and high-growth potential names beyond the benchmark-heavy large-cap universe.

FIIs Pull Out Over ₹2 Lakh Crore, Large-Caps Bear the Brunt

The ongoing year has witnessed a sharp sell-off by FIIs, with cumulative outflows exceeding ₹2 lakh crore from Indian equities. Large-cap counters have been at the receiving end of this selling spree, as global investors booked profits in heavily owned blue-chip names following significant rallies in previous quarters.

Analysts attribute this trend to a combination of global interest rate uncertainty, geopolitical tensions, and valuation concerns in the large-cap segment. As a result, FIIs have selectively shifted capital toward under-owned mid- and small-cap stocks that offer better relative value and stronger domestic growth linkages.

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Sector-Wise Trends: Defensive Plays Lose Shine

The sectoral breakdown reveals a clear rotation in FII portfolios. Energy (-9.3% YoY), Utilities (-10.1%), and Consumer Staples (-7.3%) saw noticeable declines in foreign ownership. These traditionally defensive and high-valuation sectors have fallen out of favor amid a renewed focus on cyclical and growth-oriented industries.

In contrast, FIIs modestly increased their exposure to sectors such as Industrials (+3.9%), Healthcare (+12.9%), Information Technology (+7.9%), Materials (+7.6%), Media (+17.1%), Telecom (+14.4%), and Transportation (+16.2%).

This suggests that global investors are betting on India’s manufacturing revival, digital transformation, and infrastructure expansion, which are expected to drive earnings growth over the medium term.

DIIs Step Up as Stabilizing Force

While FIIs have been cautious, Domestic Institutional Investors (DIIs) have emerged as the key stabilizers of the Indian market. Sustained inflows into mutual funds and insurance companies have offset foreign outflows, helping maintain overall market stability.

Elara Capital’s report noted, “Domestic institutions have become the backbone of India’s equity markets, countering FII withdrawals and reinforcing resilience across sectors.”

DIIs have continued their counter-cyclical buying trend, especially in sectors aligned with India’s consumption and capex cycles. Notably, Consumer Discretionary (+26.4% YoY), Telecom (+5.5%), and Financials (+12.4%) witnessed robust domestic buying, reflecting confidence in India’s internal demand strength.

However, Media (-16.6%) and Utilities (-11%) saw lower DII interest, primarily due to weaker earnings visibility and limited near-term catalysts.

Promoter Holdings Decline Amid Rising Institutionalization

The trend of declining promoter shareholding continues across market segments, highlighting increased institutional participation and growing market depth.

Promoter stakes in Nifty 50 companies fell to 40% from 44% in FY21, while mid-cap and small-cap promoter holdings declined sharply to 54% and 50%, respectively. This marks a structural shift toward broader market ownership and greater institutionalization of Indian equities.

At the same time, public shareholding, which had surged during the FY21–FY22 retail boom, has gradually normalized. In the Nifty 50, retail holdings stand at 11.3%, while small-cap stocks remain retail-heavy at 20%, reflecting sustained investor enthusiasm for emerging growth stories.

India’s Equity Landscape: From FII-Driven to Domestically Anchored

The broader theme emerging from these shifts is the evolution of India’s equity market from being FII-dominated to domestically anchored. The deepening participation of DIIs, growing retail investor base, and consistent promoter confidence have created a more balanced and resilient market structure.

With India’s GDP growth, corporate earnings, and capex cycle showing steady improvement, market experts believe domestic liquidity will remain a key driver even if foreign flows remain volatile in the near term.

The rotation toward mid- and small-caps also underscores a structural broadening of the market, where investors are increasingly willing to explore beyond the traditional large-cap universe in search of superior earnings growth and diversification opportunities.

Outlook: Selective Rotation, Long-Term Strength

While FIIs may continue to exercise caution amid global headwinds, their shift toward mid- and small-cap segments reflects a strategic repositioning rather than a full-scale retreat. India’s strong macroeconomic fundamentals, policy continuity, and expanding retail participation continue to offer long-term opportunities for both domestic and global investors.

Analysts expect this selective market rotation to persist into 2026, with capital likely flowing into sectors tied to India’s manufacturing, digital, and infrastructure growth. As domestic investors keep supporting valuations, India’s market structure appears more resilient and self-sustained than ever before.

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