Midcap and smallcap stocks are taking a bigger share of the Indian market, with their weight in the Nifty-500 rising to cycle highs, according to a YES Securities report. The report said periods of rising mid & smallcap participation have historically been accompanied by strong gains in the broader market, as improving market breadth provides a base for sustained rallies.

YES Securities said the rise in SMID participation is being supported by robust cash market activity, higher trading volumes and continued investor interest beyond large-cap stocks. It added that mutual funds, foreign institutional investors and domestic institutional investors have steadily increased their exposure to the segment, reflecting growing conviction in broader earnings opportunities.

According to YES Securities, mid- and small-cap stocks now account for a record share of the Nifty 500 market capitalisation, pointing to a shift in market leadership beyond large-cap names. The report said that, historically, rising SMID participation has been linked to stronger market breadth and sustained index rallies, and that the continued increase in SMID market share supports the case for the next phase of market growth.

The report said liquidity conditions remain highly supportive, with combined NSE and BSE cash turnover returning to the upper end of its historical range. YES Securities said strong trading activity usually reflects healthy market participation and provides an important base for sustained SMID performance.

YES Securities also said volume growth is being driven by mid- and small-cap stocks. The contribution of Mid150 and Small250 stocks to overall cash turnover has increased materially over the past few years, indicating that investors are deploying capital deeper into the market rather than concentrating only on large-cap names.

On flows, YES Securities said the composition of equity mutual fund assets has gradually shifted away from large-cap funds towards mid-cap, small-cap, sectoral and thematic categories. The report said this points to continued retail investor interest in higher-growth opportunities beyond benchmark-heavy portfolios.

Foreign investors have also steadily expanded their ownership in both mid- and small-cap segments, according to YES Securities. The report described this as a notable shift from the traditional preference for large-cap stocks and said it reflects growing confidence in India’s broader earnings landscape. It added that domestic institutional investors have also increased allocations to SMIDs over time, with the alignment of domestic and foreign flows providing support for sustained participation in the segment.

YES Securities said the combination of expanding market participation, supportive liquidity and rising institutional ownership suggests that the current increase in SMID leadership could pave the way for the next phase of the Indian equities upcycle.

May was marked by a rotation towards India-focused growth themes, with buying concentrated in banking, consumption and industrial names and selling more visible in IT, metals and PSU stocks, it said. Domestic mutual funds reshaped their portfolios in May, cutting exposure to export-oriented sectors and raising allocations to banking, consumption and industrials, as per the report.

The report said fund managers were aggressive buyers in select financial and consumer-facing companies while reducing holdings in IT, metals and PSU stocks, signalling a shift towards domestic growth opportunities.

ICICI Bank was the biggest beneficiary, with mutual funds adding ₹4,427 crore. Other additions included Gujarat State Petronet, Lenskart, HDFC Bank, Groww, Reliance Industries, JSW Energy, Adani Enterprises, LIC and Kotak Mahindra Bank.

On the sell side, Infosys and Wipro led the cuts, followed by Vedanta, GVT&D, Larsen & Toubro, MCX, Lupin, Hindalco, NTPC and Bharat Electronics. Promoter buying was seen in Aspira Pathlab and Kreon Finnancial, while 3B Films and Central Bank saw promoter selling.