Indian retail investors are displaying unusual patience in the face of weak market returns, continuing to pour money into mutual funds through systematic investment plans (SIPs) and fresh lump-sum allocations even after nearly two years of poor performance, according to a strategy report by Kotak Institutional Equities.
The report shows that equity-oriented mutual funds have mobilised Rs 1.1 trillion of active inflows in the first quarter of calendar 2026, at a time when the weighted-average net asset value (NAV) of equity funds has fallen 14 per cent from its September 2024 peak and slipped below June 2024 levels in March 2026.
This divergence between flows and returns is emerging as a defining feature of India’s equity market in 2026.
According to the report, retail investors continued SIP contributions and even stepped up allocations during the sharp market correction in March, despite equity mutual fund investors recording negative internal rates of return across most SIP start dates between mid-2024 and early 2026. The report’s XIRR analysis shows returns slipping into negative territory for a wide cohort of investors following the March fall.
At the same time, the appetite for direct equity trading appears to be fading. The number of active clients across major brokerages fell 7.1 per cent year-on-year in FY2026, signalling a gradual retreat from the do-it-yourself investing trend seen between FY2021 and FY2025.
The data suggests that retail investors are shifting away from direct stock-picking and placing greater faith in professionally managed vehicles, even as those vehicles deliver disappointing short-term outcomes.
The report notes that most fund categories saw higher retail flows in March. Allocations towards passive funds, multi-asset funds and flexi-cap funds rose sharply in the first quarter, indicating that investors are seeking diversification and lower-volatility strategies after the market turbulence.
However, the pain is most visible in segments that attracted significant flows earlier. Small-cap and sectoral or thematic funds have delivered sharply negative aggregate returns over the past 21 months, even though they captured a meaningful share of investor money during this period.
While retail money has stayed resilient, foreign portfolio investors have moved in the opposite direction.
The report highlights that India saw USD 19 billion of foreign portfolio equity outflows in calendar year-to-date 2026. Of this, USD 14.2 billion was sold during the market correction between 28 February and 30 March and a further USD 3 billion was sold during the subsequent recovery phase.
This selling has coincided with India underperforming other emerging markets such as South Korea and Taiwan in recent months. As a result, those markets have seen rising weights in global indices at the expense of India, while passive exchange-traded fund flows have turned positive for them but remained weak for India.
Domestic mutual funds have effectively absorbed this foreign selling. Strong active and passive inflows, including allocations from the Employees’ Provident Fund Organisation into equities, have helped offset foreign exits. This has, however, come at the cost of lower cash buffers within mutual funds, as cash levels declined modestly in March.
Balanced and multi-asset funds have not materially raised their equity allocations despite the correction, suggesting caution among fund managers as well.
The report argues that foreign investors may continue to adopt a nuanced stance towards India until earnings visibility improves and valuation premiums over other emerging markets moderate. India continues to trade at a higher price-to-earnings and price-to-book multiple than many peers despite its weaker recent performance.
Kotak’s estimates show Nifty earnings growth of 8.2 per cent in 2026, rising to 18.1 per cent in 2027 and 14.3 per cent in 2028, with the index trading at 22.7 times 2026 earnings.