Direct Holdings Decline
In the third quarter of the 2025-26 fiscal year, which concluded on December 31, 2025, the proportion of total market capitalization on the National Stock
Exchange (NSE) held directly by retail investors fell to its lowest point in four years, standing at 7.25 percent. This marks a significant shift for individual investors, who are defined as those holding shares valued at ₹2 lakh or less in any single listed company. Several factors are believed to have contributed to this downturn, primarily the increased volatility experienced in the market and the disappointing trailing returns that have dampened the sentiment of many individual participants. Alongside retail investors, high-net-worth individuals (HNIs), defined as those holding over ₹2 lakh in a single company's shares, also saw a slight reduction in their market presence, with their share decreasing from 2.09 percent in the previous quarter to 2.03 percent. Consequently, the combined ownership of both retail and HNI investors reached a three-year low of 9.28 percent, indicating a broader trend of reduced direct participation by individual investors in the equity market.
SMID Stock Impact
Market analysts and participants attribute the considerable decrease in the value of direct individual shareholdings significantly to the sharp price corrections observed in small and midcap (SMID) stocks. While the main Nifty index was only 1.8 percent shy of its January 2026 closing highs, the Nifty Small Cap index was considerably further behind, at 11.6 percent away from its peak. This broad market downturn led individual investors to become net sellers of stocks valued at ₹1,714 crore during the 2025 calendar year, a stark contrast to their net buying activity of ₹1.67 trillion in 2024. In fact, retail investors were net sellers in seven out of the twelve months of 2025. G Chokkalingam, founder of Equinomics, explained that many stocks within the SMID segments have experienced declines ranging from 20 percent to 50 percent, and it is precisely these segments where individual investors typically hold a greater proportion of their investments. He further noted that over the past year, the share of the top 250 largest companies in overall market capitalization has grown significantly, while SMID stocks have seen a much more substantial erosion in value. Despite these recent setbacks, Chokkalingam expressed optimism, suggesting that the value of retail and HNI shareholdings could see a recovery in upcoming quarters as SMID stock valuations have become more attractive and market sentiment has improved, especially following the recent trade agreement between India and the United States.
DII Dominance Rises
While direct individual ownership of equities has weakened, the dominance of domestic institutional investors (DIIs) in the market has continued to strengthen, reaching an all-time high in Q3 FY26. Their holdings climbed to an impressive 18.72 percent, an increase from the 18.28 percent recorded as of September 30, 2025. This growth was supported by substantial net investments amounting to ₹2.1 trillion flowing into the market during the quarter. The primary drivers behind this surge were domestic mutual funds (MFs), whose ownership share ascended to a record 11.1 percent. Pranav Haldea, managing director of Prime Database Group, highlighted that MFs are on track to potentially surpass foreign investors in terms of market share in the coming quarters, a trend that gained momentum after demonetization in 2016 and accelerated during the Covid-19 pandemic. Fueled by consistent inflows from retail investors via systematic investment plans (SIPs), MFs deployed a net ₹1.1 trillion in investments during the quarter, even as foreign institutional investors experienced net outflows totaling ₹11,765 crore. This contrasting flow underscores a significant shift in market dynamics, with domestic institutions consolidating their position.
FPIs Shift and Performance
Foreign portfolio investors (FPIs) continued to see their market share diminish, reaching a 13-year low of 16.6 percent in Q3 FY26, largely due to persistent selling pressures. Despite this reduction in their overall holdings, FPIs demonstrated remarkable effectiveness in their investment allocations, with the average share price of stocks they owned experiencing a notable increase of 7.1 percent during the quarter. Domestic institutions followed, with the average price of their held stocks rising by 2.4 percent. In stark contrast, stocks predominantly owned by retail investors experienced the steepest decline among all ownership categories, with their average share price dropping by 10.3 percent. This divergence in performance highlights the differing strategies and impacts of various investor classes on market valuations, with FPIs and DIIs showing resilience and growth in their portfolios while retail investors faced significant paper losses on their direct holdings.
