The Nifty 50 reached an intraday high of 25,932 on October 21, 2025, also a one-year high and just a few hundred points short of its lifetime intraday record of 26,277.35 hit on September, 27, 2024.
Even as the benchmark held firm, mutual funds cut exposure to small-cap stocks, Jefferies said in a report released on October 21.
According to the brokerage, large institutional investors including the Employees’ Provident Fund Organisation (EPFO), National Pension System (NPS), insurance firms and Alternative Investment Funds (AIFs) increased their allocations to large-cap companies.
Jefferies said the change was driven by stretched small-cap valuations and a tilt toward firms with steadier earnings and deeper liquidity.
Mutual fund inflows slowed as managers booked caution
Jefferies’ data showed that equity mutual fund inflows (excluding ETFs) were around Rs 35,800 crore a month (USD 4.3 billion) in 2025 so far, compared with Rs 42,500 crore a month (USD 5.1 billion) last year.
This moderation brought down the mutual funds’ share of total domestic equity flows to 58 per cent, from 70 per cent in 2024.
Money invested outside SIPs or discretionary inflows fell sharply to Rs 10,000 crore a month (USD 1.2 billion), nearly half the level seen last year.
Fund houses also maintained higher cash levels. Cash as a percentage of equity assets was 5.1 per cent in September, down from 6.6 per cent in April, but still above the long-term average.
Jefferies said this showed fund managers were being selective after a broad rally in smaller companies. “Discretionary flows have slowed as valuations rose,” the brokerage said. “Funds are keeping liquidity ready for redeployment when prices correct.”
SIP flows kept retail money in the market
Despite slower discretionary buying, Systematic Investment Plans (SIPs) continued to bring in steady money every month.
Jefferies’ data showed SIP inflows of about Rs 25,800 crore (USD 3.1 billion) a month in 2025, roughly 18 per cent higher than a year earlier.
SIPs now account for 42 per cent of total domestic equity flows and nearly 73 per cent of mutual fund inflows.
The SIP corpus stood at Rs 13 lakh crore (USD 156 billion) as of March 2025, with around 30 per cent of the money invested for more than five years.
Jefferies said this consistency helped support equity demand even during periods of profit booking. “SIP flows have become structural and continue to steady the market,” it said.
Institutional investors added larger shares of domestic equity flows
Non-mutual-fund institutions insurance companies, pension funds, provident funds and AIFs invested far more this year.
Jefferies’ report showed they put in about Rs 24,100 crore a month (USD 2.9 billion) in 2025, 85 per cent higher than last year.
Together with mutual fund money, total domestic institutional flows stood near Rs 59,800 crore a month (USD 7.2 billion) broadly matching the levels of late 2024.
Jefferies said these inflows are more stable as they come from long-term contribution cycles rather than market sentiment. “A wider set of investors now drives India’s domestic equity flows, reducing dependence on short-term fund allocations,” the brokerage said.
EPFO and NPS flows remain reliable
Jefferies estimated that EPFO invested around Rs 4,100 crore a month (USD 0.5 billion) in equities this year, while NPS added about Rs 8,300 crore a month (USD 1 billion).
Together, they provided a combined inflow of about Rs 12,400 crore a month (USD 1.5 billion), higher than the previous year.
These pension-linked flows have become a constant source of liquidity, Jefferies said. Contributions to EPFO and NPS are steady and not affected by short-term market moves.
Insurance companies, especially life insurers through ULIP-linked products, also continued regular equity buying, helping keep the market supplied with long-term capital.
AIF inflows increased as family offices grew active
Alternative Investment Funds (AIFs), particularly Category-III funds, expanded their market activity.
Jefferies said AIF inflows averaged Rs 5,000 crore a month (USD 0.6 billion) in 2025, 26 per cent higher than a year ago.
These funds are increasingly used by family offices and high-net-worth investors looking for managed exposure outside traditional mutual funds.
Jefferies said the rise in AIF inflows added to demand for large and mid-cap stocks, increasing the diversity of domestic equity flows.
Mutual funds reduced small-cap exposure amid valuation concerns
Between April and September 2025, mutual funds cut small-cap exposure by around 150 basis points of total equity AUM, Jefferies found.
The move followed two years of sharp outperformance in small and mid-cap indices that left valuations stretched and earnings support limited.
Jefferies said managers shifted focus toward larger, better-traded companies. “The adjustment in small-cap exposure is valuation-led,” it said. “Funds are staying selective and keeping cash for future deployment.”
This move, the brokerage added, was not driven by outflows but by caution after strong gains. That selectivity, it said, should keep market valuations more balanced.
Retail buying slowed but participation widened
Jefferies said direct retail flows into equities fell to about Rs 1,700 crore a month (USD 0.2 billion) in 2025, compared with Rs 13,300 crore a month (USD 1.6 billion) last year.
The fall showed fewer investors entering markets for short-term trading gains.
Even so, participation continued to widen. The NSE’s investor base rose to nearly 12 crore accounts, though new account openings slowed.
Jefferies said this shift from short-term trading to steady investing through SIPs has made retail participation more stable and long-term in nature.
Household equity allocation in India still leaves room to grow
Jefferies estimated that structural inflows from SIPs, pension funds and insurance together total about Rs 5 lakh crore a year (USD 60 billion).
This pool of regular money has become a base that helps sustain liquidity even when foreign investors turn sellers.
However, household equity allocation in India remains low around 7 per cent of total assets and 20 per cent of financial assets are invested in equities.
In contrast, households in developed markets often hold 40 per cent or more of their wealth in listed equities.
Jefferies said this gap indicates the long-term potential for higher domestic equity participation as Indian savings continue to shift from physical to financial assets.
Market impact and outlook
Jefferies said this year’s pattern of flows has made India’s market steadier at the index level but more uneven across segments.
Large-cap stocks have attracted consistent demand from institutional investors, while smaller companies remained more sensitive to mutual fund positioning. “If discretionary inflows stay weak, small and mid-cap stocks may continue to see sharper moves,” Jefferies said. “But stable SIP, EPFO and NPS flows should keep overall liquidity firm.”
The brokerage added that the next phase of market behaviour will depend on how fund managers deploy the cash they are holding. A shift back into select mid-caps could broaden the rally, while continued caution could keep large caps in leadership for longer.
Jefferies said India’s equity market now depends less on any single investor group. Long-term institutional and retail savings have built a foundation that makes market corrections shorter and recoveries faster.