Slowly and steadily, mutual funds are beginning to act as strong counters to FII flows.

Though the dominance of FII inflows in driving the Indian equity market is unquestionable, a comparison of fund flows from FIIs and mutual funds since early 2000 shows that for about two-third of instances when the market movement was strong (notwithstanding whether it was upwards or downwards), net flows from mutual funds followed an opposite direction to that from FIIs.

Due to this, during March 2008 and April 2009, when FIIs pulled out close to $9.4 billion, net mutual fund flows were positive at about 10% of this outflow at $ 922 million. In the last two months, from mid-January, since when the market sentiment has remained dampened and FIIs pulled out close to $1.1 billion out of the market, net flow from mutual funds has grown to about 30% of this outflow to $356 million of net investments into equity market.

Also, during the the two bullish trends ? April 2009 to May 2010 and June 2010 to January 2011 period ? mutual funds on an average took out $3.3 billion from the market against an average FII inflow of $23 billion.

For determining the phases when the market followed a bullish or bearish trend, we compared the market movement with respect to a popular long-term indicator, i.e. 200-DMA (Day Moving Average). The market?s movement across its 200-DMA is generally looked as a long-term indicative move, upside being bullish and downside bearish.

While lesser equity participation from retail investors will continue to make FIIs as the mover and shaker of the equity market, any sustained trend of equity investment from this class of retail investors could change the tide.

After all, that is what drove equity markets in the US when 401 (k) pension funds were allowed to invest into equities.

Interestingly, in the last three months, inflows have been positive into equity markets which the fund managers are preferring to hold rather than invest. For February, average cash levels of equity schemes in the Indian mutual fund industry increased to 6.3%, highest in the last six months. With market volatility cooling off and Sensex crossing the 18,000-mark, some of this money could be expected to flow back into equities boosting share prices.