Expert view: Increased retail participation may drive a re-rating in valuations, says Green Portfolio PMS co-founder

Retail Investors Emerging as Market Movers

India’s equity markets have witnessed a structural shift in recent years with the rising dominance of retail investors, a trend that could significantly alter market valuations going forward. According to Divam Sharma, Co-founder of Green Portfolio, the enhanced retail participation in Indian equities may act as a key driver for a re-rating of market valuations, particularly in select segments such as small- and mid-cap stocks.

“The surge in retail investment flows into equity markets, via both direct stocks and mutual funds, is building a strong domestic investor base that could warrant a long-term re-rating of valuations,” Sharma said in an exclusive interaction.

Robust Retail Flow: A Post-Pandemic Trend

The COVID-19 pandemic served as a catalyst for increasing retail engagement in stock markets. With digital onboarding platforms, enhanced financial literacy, and the appeal of equity returns compared to traditional instruments, millions of first-time investors entered the markets over the past four years.

According to NSE data, the number of active retail investors has more than doubled since FY20, with demat account holders crossing 15 crore in FY24. Mutual fund SIPs have also touched record highs, breaching ₹21,000 crore in monthly inflows as of June 2025.

Divam Sharma notes, “Earlier, institutions dominated price discovery, but retail now has a significant role. This shift supports valuation resilience, especially during volatile global phases.”

Valuations Getting Support From Domestic Liquidity

Increased domestic liquidity has provided a cushion against foreign institutional investor (FII) outflows. The growing army of SIP investors and direct equity participants has enabled the Indian market to stay buoyant even during episodes of global uncertainty.

"Even when FIIs are net sellers, Indian indices don’t crash the way they used to. This shows how the retail ecosystem is becoming an anchor, and that’s a powerful narrative for the future," Sharma added.

Benchmark indices such as the Nifty 50 and Sensex have displayed strong resilience, scaling new highs despite global headwinds such as rising interest rates, geopolitical tensions, and slowing global growth.

Re-Rating in Small and Mid-Cap Segments Likely

While large-cap valuations remain relatively in line with long-term averages, the real re-rating may be more prominent in the mid- and small-cap segments, Sharma believes.

“We see long-term growth potential in sectors like manufacturing, renewables, capital goods, and digital services. These are areas where many mid-cap and small-cap companies operate. With consistent retail flows and structural tailwinds, these stocks may see upward valuation revisions,” he said.

The BSE SmallCap and MidCap indices have outperformed their large-cap counterparts over the past year, supported by robust earnings, government capex push, and increasing investor appetite for high-growth businesses.

Analyst View: Valuation Multiples May Expand

Experts argue that the market could move towards higher valuation multiples supported by sustained earnings growth, policy support, and domestic liquidity. The traditional yardsticks of valuation, such as Price-to-Earnings (P/E) and Price-to-Book (P/B) ratios, may need a fresh lens, especially as new-age companies and niche sectors grow.

Anand Rathi Wealth in its latest market outlook stated, “The Indian market is no longer only reacting to global cues. Domestic flows have the strength to offset external volatility. This changing dynamic may justify elevated valuation bands, particularly in consumption, infra, and tech-driven segments.”

Risks Remain, But Structural Shift Is Clear

While the optimism is palpable, experts also urge caution. Valuation re-rating does not imply markets will rise linearly. Corrections are natural and necessary.

“Retail investors should stay focused on quality, avoid herd behavior, and follow asset allocation principles,” Sharma advised. “The underlying trend is strong, but volatility will remain a part of the journey.”

Key risks include inflation flare-ups, central bank tightening, and geopolitical instability. However, with India’s economic growth projected to remain above 6.5% over the next few years and a young population embracing financial investments, the broader outlook remains constructive.

Investor Outlook: SIP Discipline and Sectoral Themes

Retail investors are advised to stay disciplined, diversify across market capitalizations, and take a long-term approach. Themes such as manufacturing-linked growth (via PLI schemes), green energy transition, and digital infrastructure offer promising opportunities.

“We are bullish on the India growth story. Investors should use market dips to build quality positions and benefit from compounding over the next decade,” concluded Sharma.

India’s capital markets are undergoing a paradigm shift. With increased retail participation, a growing SIP base, and rising financial awareness, the investor landscape is changing. This transformation could lead to a re-rating of valuations across sectors and market caps, driven by domestic confidence rather than external cues. However, as with all market transitions, prudence and informed investing remain key.