Indian retail investors suffer most in current market downturn: here’s why

Retail investors in the Indian stock market have faced severe losses as their favoured small-cap stocks tumbled more than those held by institutional investors.

Data from Bloomberg shows that in the NSE 500 universe, stocks with over 20% retail ownership have fallen by 45% from their peaks.

In comparison, stocks with similar stakes held by domestic institutional investors (DIIs) have dropped by 34%, while those backed by foreign institutional investors (FIIs) have declined by 29%.

Panic selling, margin calls hurt retail investors

The decline in retail-dominated stocks is significantly higher than the 14.3% and 13.6% drop in benchmark indices Nifty 50 and Sensex, respectively.

Mid and small-cap indices have entered bearish territory, plunging nearly 20% from their peaks.

Ajit Mishra, Senior Vice-President for Research at Religare Broking, attributes the steeper losses among retail investors to panic selling, margin calls, and the absence of institutional support.

“In contrast, stocks with strong DII and FII ownership tend to hold up better, as institutions step in to buy during corrections,” he said.

Retail appetite for small-caps remains high

Despite the market turbulence, retail investors have maintained their aggressive stance on small-cap investments.

As of the December 2024 quarter, retail holdings in small-cap companies stood at Rs 10.3 trillion, the highest apart from promoters’ stakes.

Data from primeinfobase.com reveals that retail investors hold an all-time high of 26.56% in small-cap stocks, while FIIs and DIIs hold 21.36% and 24.95%, respectively.

This trend contrasts with large-cap companies, where institutional investors dominate with over 35% ownership, while retail investors hold only 12.25%.

Why retail investors suffer most during market downturns?

G Chokkalingam, founder and Head of Research at Equinomics Research & Advisory, observed that retail investors consistently suffer the most during market downturns.

According to Chokkalingam, most investors tend to get influenced by stock momentum during a bull market.

This trend has been observed globally across different market cycles, affecting both high-quality and inferior stocks.

This is because, in many cases, valuations are stretched, profits and growth are weak, businesses lack durability, and there are governance issues within companies.

While market-wide corrections occur, Chokkalingam noted that quality stocks typically decline less compared to inferior ones.

Strategy for recovery

Market experts believe the road to recovery depends on the quality of stocks held.

Kranthi Bathini, Director of Equity Strategy at WealthMills Securities, emphasized that stock prices ultimately follow earnings.

“Ultimately, stock prices are slaves to earnings,” he said, adding that if earnings outlooks remain positive, stock prices are likely to rebound.

However, if earnings visibility is unclear, retail investors must carefully assess their positions.

For traders, he stressed the importance of setting stop-loss levels as a crucial risk management strategy.

Similarly, Mishra suggested that if a stock has strong fundamentals and is only down due to market sentiment, it could be worth averaging down.

However, he recommended cutting losses on companies with weak financials, high debt, or poor management.

Lack of institutional backing leaves retail investors vulnerable

In 2025, foreign portfolio investors (FPIs) were net sellers of Rs 1.4 trillion, marking the worst start to any year, according to data from the National Securities Depository Ltd.

In contrast, domestic institutions bought Rs 1.7 trillion worth of stocks during the same period, cushioning the market from further decline.

With retail investors holding the largest stake in small-cap companies, the lack of institutional backing leaves them more vulnerable to market volatility.

Experts suggest that retail investors adopt a more disciplined approach, focusing on fundamentally strong stocks and avoiding speculative bets to weather future market corrections.

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