Retail Traders Feel The Strain As India’s Small Caps Stumble

India’s small-cap stocks are sharply trailing their larger peers, dealing a blow to retail investors who dominate trading in the segment.

Individual investors are dumping small-cap shares, making these vulnerable to more losses in the coming year. They have sold about 300 billion rupees ($3.3 billion) of local shares on a net basis so far this quarter, putting them on pace for the biggest quarterly selloff in more than two years, according to data compiled by Bloomberg.

The NSE Nifty Smallcap 250 Index is on course for its biggest yearly underperformance in six years against the benchmark NSE Nifty 50 after a nearly 9% decline so far in 2025. That’s a sharp reversal from its stellar show in the previous two years and reflects growing investor angst due to lofty valuations and sluggish returns. The underperformance is reflective of similar trends in regional markets.

“There could be more pain in small caps,” Rashi Talwar Bhatia, chief investment officer at Ashmore Investment Management India LLP, said. “Given weak past returns, individual investors seem to be getting impatient.”

Retail investors have also unwound a sizeable chunk of their long derivative positions in the market, while adding to their shorts wagers on Monday. The bearishness reflects a growing recognition that valuations have run ahead of fundamentals for small caps. Components of the Nifty Smallcap 250 are trading at about 24 times their one-year forward earnings, above the long-term average of 18 times.

The underperformance also comes when individuals investors have allocated more to mutual funds investing in small- and mid-cap stocks, with net inflows into these categories as a proportion of overall equity flows doubling in the last one year.

Earnings growth of small companies may help limit their downside. Stocks in the Nifty smallcap gauge reported a 37% year-on-year jump in net income for the September quarter, according to Motilal Oswal Financial Services Ltd.

Some indicators are pointing at more pain for the segment. The smallcap gauge closed below its 200-day moving average for the first time since May on Monday — a technical break that typically signals weakening momentum in smaller stocks and can trigger further defensive positioning.

The rally which began in March has largely been led by a strong recovery in handful of largecap stocks and is far from broad-based, DSP Mutual Fund said in a note last week, as the NSE Nifty 50 Index has gained more than 9% so far this year. “Weak market breadth is an early sign of caution,” it said.