FIIs dump $19 billion, But retail keeps buying-can retail SIPs hold the line? Kotak explains

The brokerage house pointed to a widening divergence between foreign and domestic flows at a time when returns remained weak for nearly two years. It noted that Mutual Funds absorbed a large share of the selling pressure, though their cash buffers had started to decline. The report indicated that while markets appeared stable on the surface, underlying trends suggested rising stress points that could test investor conviction going ahead.

Kotak Institutional Equities on relentless FII selling

Kotak Institutional Equities said foreign portfolio investors remained persistent sellers in Indian equities across both declining and recovering phases of the market. The report highlighted that between February 28 and March 30, foreign investors sold $14.2 billion during the correction phase, followed by an additional $3 billion of selling from March 31 onwards even as markets attempted a recovery. This brought total outflows in calendar year 2026 to nearly $19 billion.

The brokerage noted that selling during both downturns and upswings indicated a broader lack of conviction among global investors rather than a short-term term reaction to volatility. It also pointed out that India’s relative performance lagged other emerging markets during this period, which contributed to continued outflows.

“Indian equity markets witnessed relentless FPI outflows in the past 45 days,” Kotak Institutional Equities said.

Kotak Institutional Equities on retail money holding the line

Kotak Institutional Equities said retail investors continued to show resilience through Mutual Fund investments despite volatile markets and weak trailing returns. The report noted that systematic investment plan inflows remained steady through the March 2026 correction, while lump sum investments increased during market dips. 

However, it also highlighted that the number of active direct equity investors declined in financial year 2026, suggesting that participation outside Mutual Funds weakened. The brokerage indicated that while retail investors continued to commit capital through institutional channels, their confidence in direct stock investing appeared to be fading gradually.

“Retail investors reposed faith in Mutual Funds but wavered in direct investments,” Kotak Institutional Equities said.

Kotak Institutional Equities on weak returns testing patience

Kotak Institutional Equities said returns from equity-oriented Mutual Funds remained under pressure from July 2024 to March 2026. The report stated that the weighted average net asset value of equity funds declined 14% from peak levels recorded in September 2024, reflecting the impact of prolonged market volatility and corrections in broader segments.

It further noted that small-cap and thematic funds underperformed the overall equity category during this period, even though they attracted a significant portion of inflows. The brokerage suggested that sustained weak returns could eventually test the conviction levels of both new and existing retail investors if the trend continued.

“Returns have been quite abysmal for two years now,” Kotak Institutional Equities said.

Kotak Institutional Equities on domestic funds absorbing the pressure

Kotak Institutional Equities said domestic institutional investors, particularly Mutual Funds, played a crucial role in absorbing the selling pressure created by foreign investors. The report noted that strong inflows into both active and passive funds, along with allocations from retirement-linked pools such as EPFO, helped stabilise markets during the recent phase of volatility. However, it also pointed out that this support came alongside a gradual decline in cash levels held by Mutual Funds, which reduced their ability to act as a buffer against sustained outflows.

“Continued FII selling was largely absorbed by domestic Mutual Funds,” Kotak Institutional Equities said.

Kotak Institutional Equities on shrinking buffers

Kotak Institutional Equities said cash levels within Mutual Funds declined in recent months as funds deployed money to counter foreign selling. The report noted that this reduced the available cushion to absorb further outflows if the current trend continued. It also highlighted that balanced funds and multi-asset funds did not materially increase their allocation to equities in March 2026, indicating a cautious stance among fund managers. 

The brokerage suggested that lower cash levels could limit the ability of domestic institutions to provide the same level of support in case of continued pressure from foreign investors.

“Cash levels of Mutual Funds have come off, resulting in lower buffers against continued FPI selling,” Kotak Institutional Equities said.

Kotak Institutional Equities on India underperforming peers

Kotak Institutional Equities said India underperformed several emerging markets such as South Korea and Taiwan in recent months. The report highlighted that this relative underperformance led to an increase in the weight of these markets in global portfolios at the expense of India. 

It also noted that passive flows into India remained weaker compared to these peers, reflecting a broader trend of capital moving towards markets that delivered better near-term performance. The brokerage indicated that this shift in global allocation trends contributed to sustained foreign outflows from Indian equities.

“We note that the performance of India was weaker compared to other EMs such as South Korea and Taiwan,” Kotak Institutional Equities said.

Kotak Institutional Equities on valuation concerns

Kotak Institutional Equities said India continued to trade at a premium compared to other emerging markets despite weaker recent performance. 

The report noted that unless there was a meaningful improvement in earnings outlook and relative valuations, foreign investors were likely to remain cautious on India. It suggested that the combination of elevated valuations and moderate earnings visibility could limit near-term upside and keep global flows selective. The brokerage indicated that foreign investors may continue to adopt a calibrated approach until there are clearer evidence of improvement in fundamentals.

“FPIs may continue to keep a nuanced stance towards India until India’s earnings outlook and valuations versus other major EMs improve materially,” Kotak Institutional Equities said.

Conclusion

Kotak Institutional Equities presented a picture of a market where domestic flows continued to provide stability even as foreign investors pulled back. The report indicated that retail participation through Mutual Funds remained steady, though direct equity activity weakened and returns stayed under pressure over an extended period. 

It also pointed out that declining cash buffers and elevated valuations added to the challenges. The overall assessment suggested that while domestic flows currently supported the market, the sustainability of this support depended on the continuation of inflows and improvement in earnings visibility.

Disclaimer: This market analysis is based on report findings by Kotak Institutional Equities and is intended for informational purposes only. It does not constitute a recommendation to buy, sell, or hold any specific securities or mutual fund products. Given the noted market volatility and valuation concerns, readers are advised to consult a SEBI-registered investment advisor before making any financial decisions.

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