Illustrating the power of retail investors in driving stock prices higher against the diktat of the big boys of Dalal Street in a David vs Goliath-styled battle, at least 35 smallcap stocks have rallied despite both mutual funds and foreign institutional investors (FIIs) cutting stakes.

A study done by ETMarkets shows that there were at least 87 smallcap stocks in which retail investors, as defined by those with investments up to Rs 2 lakh, increased stake in the December quarter but FIIs and MFs sold. Out of them, there are 35 stocks that have given double-digit returns since October 2023.

Take Inox Wind Energy for example. In Q3, MF ownership fell 112 basis points to 3.75% while MF stake also fell 10 bps to 1.10%. Retail investors showed faith in the smallcap green energy stock by increasing stake from 9.38% in Q2 to 10.91% in Q3. The smallcap stock has delivered a mind-boggling return of 185% since October with most of the gains having been achieved in Q3 itself.

Similarly, shares of Prestige Estates Projects almost doubled in Q3 itself but FII holding fell 143 bps to 18.07% during the quarter while MF holding also fell 27 bps to 11.91%. Main Street had a different take on the stock as retail stake rose from 1.50% to 2.26% quarter-on-quarter.

Also read | Mutual funds showing red flags to smallcap investors. Ignore at your risk!BEML Land Assets also saw MF holding going down 321 bps to 9.83 bps while FII stake fell 39 bps. But the ‘janta’ holding rose from 20.94% to 22.39%. The stock is up about 64% since October.Navratna PSU rail stock RITES saw MF holding going down by 49 basis points to 4.75% while FIIs also pared stake by 76 bps to 3.22%. The smallcap is up 52% this year after having a fantastic 2023 like all other PSU or rail stocks.

Mutual fund managers have been pointing out how retail ownership in the smallcap segment has become sizeable enough to even cross institutional holding in many cases. Multibagger MSTC, shares of which have more than doubled since October, is an extreme example in which retail holding was seen touching 16% in the December quarter but MF stake was just 0.11% while FIIs held 3.33% stake.

Similarly, defence PSU stock Cochin Shipyard’s shareholding pattern reveals low institutional ownership at 6% (MF and FII) while retail controlled over 14% stake.

The impact of retail ownership gets more pronounced in case of low-free float stocks, most of which belong to the PSU family. Stocks like Bank Of Maharashtra, Punjab & Sind Bank, UCO Bank, Central Bank of India, State Trading Corporation and FACT are examples where the free float is less than 10%.

Market veterans have been warning retail investors that chasing low-grade small and microcap stocks is a recipe for disaster. “Surprisingly, fear is very low in the market. Investors should remember the famous Buffet quote – Be fearful when others are greedy. History teaches us that excessive valuations are unlikely to sustain. Therefore, investors chasing mid and small caps even at excessive valuations are taking big risks. It is better to err on the side of caution,” said VK Vijayakumar of Geojit Financial.

While mid and smallcaps have outperformed in the last one month, the degree of outperformance has reduced. Whenever the smallcap music stops, the rush for the exit door will be longer in case of illiquid stocks.

Also read | Warning signs flash for over 100 smallcap multibaggers. Is it a bubble waiting to burst?

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)