The year 2024 is ending and after a few days the new year i.e. 2025 will begin. If we look at the stock market, this year has not been good. There are many factors like geopolitical tension, high Fed rate and high valuation, due to which the market is able to give returns of only around 10% this year. However, this year small and midcap stocks dominated the market. But will their charm continue even in the year 2025? Let us know.
Market going through major changes
The Indian stock market is going through a major change. Earlier investors preferred to invest money in shares of big companies. Now investors have started liking mid and small cap segments more. This is the reason why investment in Nifty-50 and top companies is seen continuously falling. For example, FPI had a holding of 1200 shares 4 years ago, which has now increased to more than 1800 shares. Similarly, domestic mutual funds are also including shares of small companies in record numbers in their portfolio. The reason behind this is the attractive valuation of small companies and increasing growth prospects. In such a situation, these shares are proving to be a good option for investors looking for long term growth.
What is the Herfindahl-Hirschman Index (HHI)?
This index indicates market concentration. In simple words, if HNI is low, it means that there is lower concentration with higher number of shares in the portfolio. Let us know what trend this index is showing at this time.
Institutional Investors: HNI for Institutional Portfolios in NSE listed companies has fallen to 175 in the September quarter. This is the lowest since 2001.
Domestic Mutual Funds: Here the HNI was at 137 in the September quarter, which is a 25-quarter low.
Foreign Portfolio Investor: FPI’s HNI stood at 217 in the September quarter. This is the lowest since 2001.
This decline in HNIs across various investor groups indicates a strategic shift towards mid and small cap stocks as investors look for growth amid all-time high valuations in the market.
FPI holdings are increasing
From December 2020 to September 2024, FPIs have significantly expanded their investment horizon in India. He has increased his holdings from 1,200 companies to more than 1,800 companies. Meanwhile, the number of companies in which FPI has more than 5% stake is also continuously increasing. Domestic mutual funds are also continuously increasing their investments in companies of different market caps.
Why is the trend changing?
The reason behind this new trend is that smallcaps and midcaps offer better earnings growth and attractive valuations. However, valuations of mid and small caps are still elevated. But they offset this with better-than-expected earnings growth and strong ROE.
What is the fund flow saying?
Now let us also look at the fund flow. In October, FPIs had made net sales at a record level. This selloff was especially in the top-100 stocks. While some buying was seen in other segments of the market. This shows that foreign investors are increasing their exposure to Indian markets with small caps and midcaps through strategic diversification.
conclusion
This trend of diversification in the Indian stock market reflects the maturity of investment strategies. Where both domestic and foreign investors are seeing possibilities beyond traditional largecap stocks. This trend not only supports market stability but also promotes growth in the mid and small cap segments. However, investors should remain cautious as sectoral concentration in some industries increases the need for research into portfolio management in different market conditions.
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