Mid and Small Cap Stocks to Outperform Large Caps When FII Flows Return
Indian mid- and small-cap stocks will outperform their larger peers when foreign institutional flows turn positive, according to Samir Arora of Helios Capital. In a recent televised interview with NDTV Profit, Arora stated that India’s underperformance compared to global stocks is too wide now, and investors are allocating to non-US markets, with India being no exception.
Arora’s statement comes at a time when overseas funds have pulled out Rs 1.46 lakh crore from Indian equities so far in 2025. However, after three consecutive months of selling, October has recorded a positive flow of Rs 8,100 crore so far, as per NSDL data. This shift in sentiment could be a sign of things to come, and investors would do well to keep an eye on the mid cap stocks and small cap stocks that are likely to benefit from the return of FII flows.
Why Mid and Small Cap Stocks Will Outperform
According to Arora, FIIs have been selling large financial stocks, information technology, and consumer companies, while shifting a small portion of their portfolio to smaller and new-age companies. If FIIs start buying, large-caps will do well, but that will give domestic fund managers confidence to go aggressive on small- and mid-caps. This could lead to a surge in mid cap stocks outperforming large caps and small cap stocks outperforming large caps.
India’s benchmark Nifty and Sensex have edged close to their September 2024 peak, driven by consistent domestic inflows that have supported the market amid FII exodus. The Nifty versus Nifty Midcap 150 year-to-date and Nifty versus Nifty Smallcap 250 year-to-date charts also suggest that mid and small cap stocks are due for a rally.
Impact of Trade Deal with the US
Arora also noted that FIIs will have a greater interest in India after a trade deal with the United States goes through. The trade talks between the two countries are progressing, with both countries engaged in discussions, according to Commerce and Industry Minister Piyush Goyal. India and the US want to conclude the first tranche of the trade pact by the end of the year, which aims to more than double the bilateral trade to $500 billion by 2030 from the current $191 billion.
President Donald Trump has claimed that India has agreed to reduce Russian energy imports in exchange for tariff relief, a key demand from Washington. Half of the 50% US tariff on Indian goods is a penalty for Russian oil purchases. A trade deal between the two countries could have a significant impact on the Indian stock market and could lead to an increase in FII flows.
Investment Strategy
So, what does this mean for investors? According to Arora, if FIIs start buying, large-caps will do well, but that will give domestic fund managers confidence to go aggressive on small- and mid-caps. This could be a good opportunity for investors to look at mid cap stocks to buy and small cap stocks to buy.
However, it’s essential to keep in mind that the stock market trends can be unpredictable, and investors should do their own research and consult with a financial advisor before making any investment decisions. It’s also crucial to have a long-term perspective and not to make any investment decisions based on short-term market fluctuations.
Conclusion
In conclusion, according to Samir Arora, Indian mid- and small-cap stocks will outperform their larger peers when foreign institutional flows turn positive. With the possibility of a trade deal between India and the US and the return of FII flows, investors should keep an eye on the mid and small cap stocks that are likely to benefit from these developments. However, it’s essential to have a long-term perspective and do your own research before making any investment decisions.
