DII inflows into equities reached a ten-month low in February

Mumbai: Domestic institutional inflows into equities slowed in February to the lowest level since April 2025, as lackluster returns over the past 18 months and a shift in investor appetite towards better-performing precious metals reduced inflows into common equity products. According to provisional data, these investors, which include mutual funds, insurers, pension funds and government bonds, bought shares worth ₹26,130.3 crore so far this month – a reduction of more than half their average purchases in the past six months.

In the last three months, domestic institutional investors (DIIs) have been robust, ranging between ₹69,000 crore and ₹79,000 crore. The sharp swings in the market – especially in mid- and small-cap stocks – may have led to a decline in domestic inflows. Mutual fund investors had doubled their allocations to precious metals in January, following the eye-popping rise in silver and gold prices. For the first time, monthly flows into gold and silver funds exceeded those into equity funds – the sector’s growth engine in recent years.

Flows chase returns and unfortunately, Indian markets have delivered tepid returns in the last 15 months, says Rupen Rajguru, Head of Equity Investment and Strategy, Julius Baer India.

“A significant portion of domestic inflows had flowed into midcaps, smallcaps and thematic funds and the underperformance in these segments could have led to reduced intensity of capital flows,” he said.

Since September 2024 – when volatility started in Indian markets – Nifty and Sensex have fallen 2.7% and 4.2%. The Nifty Midcap 150 index fell 1.3% and the Nifty Smallcap 250 index fell 13% during the same period.

“Markets attract liquidity when they perform well, but given the disappointing performance, mutual fund inflows could have also slowed,” said Siddarth Bhamre, Head of Research at Asit C Mehta Intermediates. “However, it is still too early to say whether it is a pause or a change in trend.” Domestic institutions led by mutual funds have been the bedrock of Indian equities since September 2024, when foreign funds started withdrawing en masse from the market due to concerns over slowing earnings growth and high stock valuations. Individual investors, encouraged by the eye-popping returns of mutual funds hitherto, continued to pump money into equity funds, especially through monthly Systematic Investment Plans (SIPs), hoping for a speedy recovery. But some of these expectations have been tempered by uncertainty, while the rise in silver and gold prices has prompted them to shift their incremental allocation to these assets.

“Many participants who started their SIP in 2021-2022 may feel that they have invested at a lower level,” Bhamre said. “But a large chunk of their SIPs have been deployed at higher levels over the last two to three years, and therefore the SIP returns over the last three to four years do not look attractive.”

In February so far, foreign investors have consistently sold buyers worth over Rs 895.6 crore, based on data from the exchanges. “Foreign flows have been steadily increasing following the framework of the US-India agreement and have coincided with inflows into emerging markets,” Rajguru said.

“The worst of the foreign outflows appears to be behind us, and some foreign money is expected to trickle into India.” Since October 2024, they have sold shares worth over Rs 4.02 crore. Domestic investors bought over Rs 10.6 lakh crore during the same period.

Analysts said other emerging markets such as South Korea and Brazil offer much higher growth than India. Therefore, foreign investors are in no hurry to allocate funds to India. “Foreign investors taking a pause is a change in stance, and the days of aggressive sell-offs appear to be behind us given India’s relative underperformance compared to its global peers, making it a reasonable bet,” Bhamre said.