After turning their back on domestic equities for five years, Indian retail investors have finally begun to dip their toes back into the market, a trend that could help sustain the bumper rally seen over the past year, say strategists.
"Retail investor could be the next big thing," Aditya Narian and Jitender Tokas, analysts at Citigroup Global Markets wrote in a note.
Domestic flows into equity mutual funds surpassed 108 billion rupees in July – the third straight month of net inflows - compared with outflows of 18 billion rupees in the same month a year earlier.
Retail ownership in BSE 500 companies, which represent over 90 percent of the total market capitalization on the Bombay Stock Exchange, stood at approximately 15 percent as of the end of June, according to Citi. By comparison, foreign institutional investors, a primary driver of the market's upswing in the recent months, hold around 22 percent.
India's benchmark Sensex index has surged 24 percent this year fueled by optimism that Prime Minister Narendra Modi, widely regarded as investor friendly, will push through reforms needed to revive Asia's third largest economy.
The rally, however, has stalled in the past two months owing to a number of factors including higher investor risk aversion stemming from rising geopolitical risks and disappointment over a lack of details in Modi's maiden budget.
Read MoreHow BRICS bank hurts India's Modi
Strategists expect retail participation to increase in the coming months alongside further gains in the market.
"As the market picks up momentum you'll see money coming in larger sums. Retail investors are creatures of momentum," Saurabh Mukherjea, CEO, Institutional Equities, Ambit Capital told CNBC.