Mumbai: Foreign institutional investors (FIIs) and domestic institutional investors (DIIs) are set to be net buyers of Indian shares for the second calendar year in a row. However, this is set to have a lacklustre effect on frontline indices, even as mid-cap stocks rallied, hinting that significant interest has been there in the space, which is not yet saturated.

This year could only be the fourth time on record when both FIIs and DIIs will likely be net buyers of Indian shares. Previously, both of them were net buyers in 2007, 2009 and 2015. In all these years, BSE mid-cap index outperformed the benchmark 30-share Sensex.

So far this year, FIIs and DIIs have pumped in Rs38,948.99 crore and Rs15,471.08 crore, respectively, in the domestic equity market. While Sensex is merely 0.69% higher year to date, BSE mid-cap index has added 8.09% in the same period.

“In the falling interest rate environment, mid-caps tend to do well. These companies tend to gain on various counts, including operating leverage. The macro-economic environment of the country is good, which adds to the sentiment," said Gopal Agrawal, chief investment officer, Mirae Asset Global Investments (India) Pvt. Ltd.

“The interest of mutual funds has also gradually risen in favour of mid-cap stocks, as the macro environment turns better, and as the government’s fiscal situation is in a great shape," added Agrawal.

DIIs mainly comprise of mutual funds and insurance companies.

FIIs and DIIs held 24.63% and 11.93%, respectively, in Sensex stocks at the end of September quarter, rising gradually over the quarters. This compares to 23.96% and 10.36%, respectively, at the end of March 2015 quarter, data from Capitaline showed.

Their holdings in mid-cap stocks, though less than the frontline index stocks, are also on a rise. FIIs and DIIs owned 18.28% and 7.45% in the BSE mid-cap index constituents, respectively, at the end of the September quarter, up from 17.69% and 6.50%, respectively, at the end of the quarter to March 2015.

“In a structural bull market, mid-caps always tend to outperform frontline indices. FIIs tend to tilt towards large caps, but are opting for mid-caps more than before in the last few years. DIIs tend to have a mixed interest in both," said Vikas Khemani, president and chief executive officer of Edelweiss Securities Ltd.

“As long as market stays bullish, and earnings and economic growth is around, the mid-cap story will continue to flourish," added Khemani.