India’s mutual fund industry continued to attract record levels of retail money in May, with SIP contributions nearing ₹31,000 crore and equity funds extending their inflow streak to 63 months. But the biggest winners in terms of returns were not the biggest winners in terms of investor money.
According to Vallum Capital’s Monthly Macro Grid Chartbook, equity mutual funds recorded their 63rd consecutive month of net inflows in May 2026, and the number of active SIP accounts climbed to 9.64 crore.Yet beneath the headline numbers lies a striking trend: the mutual fund categories that delivered the highest returns attracted some of the lowest inflows.
Best-performing funds got the least money
Within domestic equity funds, micro-cap funds emerged as the best-performing category in May, delivering average returns of 5.7 per cent.
Small-cap funds were the second-best performers with returns of 3.4 per cent and attracted ₹2,229 crore of inflows.
Mid-cap funds generated returns of 1.6 per cent and drew ₹3,898 crore.
In contrast, large-cap funds delivered the weakest return among major market-cap categories at just 1.5 per cent, yet attracted ₹8,565 crore — nearly four times the inflows received by small-cap funds and more than double those received by mid-caps.
Flexi-cap funds, which returned 2.1 per cent, attracted ₹5,350 crore, while Large & Mid-cap funds received ₹2,617 crore despite returning 1.9 per cent.
Micro-cap funds were this month’s best performers, gaining 5.7%. Small-cap funds returned 3.4%, the second-best showing across all cap categories, and drew ₹2,229 crore
The data highlights a paradox of India’s mutual fund market: money does not necessarily chase performance.
According to Vallum Capital, this reflects the growing dominance of SIP-driven investing, where monthly standing instructions continue to channel money into large-cap and diversified funds irrespective of short-term performance.
Large-cap funds now manage more than ₹10.5 lakh crore in assets and continue to receive steady inflows because they remain the preferred destination for long-term SIP investments.
“The pattern is unambiguous: the lower the return, the more flows the category received. This is not investor irrationality it is SIP mathematics. Monthly standing instructions on large-cap and flexi-cap index trackers mechanically route the bulk of retail savings toward the largest, most liquid end of the market, regardless of where monthly performance was generated. The result is that India’s biggest fund category by AUM large-cap, at over ₹10.5 lakh crore continues to accumulate capital even in months where smaller, higher-performing categories are left undersubscribed,” said the report.
Thematic Funds: Bets in Banking.
(total Thematic funds universe market cap is around 5.99 Lakh Cr)
Sectoral and thematic funds told a more nuanced story in May. BFSI funds led the entire thematic universe, returning 5.5% for the month and attracting ₹1,013 crore. The behaviour inside banking was even more instructive: PSU Bank funds gained 6.9% and collected Net Inflow of ₹436 crore; Private Bank funds gained 6.5% and collected ₹329 crore — together drawing ₹765 crore. Broad-basket Bank funds returned the same 6.5% as private banks and simultaneously saw ₹421 crore in redemption. Investors are actively rewarding targeted exposure and penalising category breadth at identical return levels.
Transportation and Logistics funds gained 4.4% and drew ₹194 crore. Auto funds gained 4.2% but saw a small outflow of ₹18 crore, suggesting the sector’s May bounce was not trusted as durable.
Technology funds down sharply over the past year returned 1.6% in May and attracted ₹178 crore, reversing a ₹100 crore outflow from April. The buying came specifically through passive IT index trackers (₹90 crore from IT Index funds) and large Technology Broad funds (₹185 crore), while Digital India thematic funds, which actually returned a better 2.3%, saw ₹101 crore in redemptions. Investors are dip-buying tech through index vehicles while simultaneously exiting thematic wrappers a deliberate structural preference.
the real signal: Quality funds returned -0.3% for the month and saw ₹28 crore in outflows.
Defence funds continued to attract steady Net Inflow at ₹156 crore. Railways funds posted the month’s steepest sectoral loss at -7%, with effectively no buyers in sight.
Factor Funds: Growth and Contra Lead; Defensive Factors Are Being Sold
Factor-based funds — now a ₹5 lakh crore category — showed May’s most counterintuitive flows pattern. Momentum funds posted the best monthly return across all factors at 2.9%, yet drew only ₹157 crore. Growth-style funds returned 1.9% and led the category in flows at ₹766 crore. Focused funds drew ₹662 crore at 2.1%, and Contra funds drew ₹421 crore.
The most notable trend was the selling of traditionally defensive strategies.
Quality funds posted a negative return of 0.3 per cent and recorded outflows of ₹28 crore.
Low-volatility funds generated returns of just 0.3 per cent and witnessed ₹122 crore of redemptions.
This happened despite a challenging backdrop marked by:
-
West Asia tensions -
Commodity price volatility -
Foreign institutional investor (FII) selling of ₹32,963 crore
Rather than shifting toward defensive strategies, investors largely maintained exposure to growth-oriented factors.
Domestic investors continue to overwhelm FII selling
One of the most significant developments in May was the widening gap between domestic and foreign investor behaviour.
While foreign institutional investors sold ₹32,963 crore worth of equities during the month, domestic institutional investors purchased ₹82,165 crore worth of shares.
The strength of domestic flows helped cushion markets against foreign selling pressure and highlights the growing influence of Indian retail investors.
Meanwhile, debt mutual funds recorded net outflows of ₹96,949 crore.
However, Vallum Capital noted that the decline largely reflected the unwinding of April’s extraordinary ₹2.47 lakh crore inflow, which had been driven by year-end treasury and institutional liquidity management. The reversal was therefore technical rather than a sign of weakening demand for debt funds.
India has 27.65 crore mutual fund investor accounts today up from 10.04 crore just six years ago. Its SIP infrastructure now generates nearly ₹31,000 crore every month without flinching. What May 2026 confirms is that the inflow machine is built and running. The open question is allocation quality: the funds that earned the most in May got the least money, the funds that earned the least got the most, and the only categories being actively bought with discretion banking specifics, technology passives, infrastructure recovery plays are those where informed capital is operating alongside, not inside, the SIP stream.
The resilience of India’s retail investor is no longer in question. What May 2026 reveals, instead, is a sharper question: where is the money actually going — and is it going to the right place?