Direct equity inflows decline: Focus on key fundamentals, not panic

Replace underperformers with quality, well-researched stocks

With the markets remaining flat over the past year, many investors who had begun direct equity investing in the recent bullish phase have exited. Retail investors’ net inflows into direct equities plunged from ₹1.16 trillion in January–September 2024 to ₹12,408 crore in the same period of 2025, a fall of nearly 90 per cent.

 

Why have inflows declined 

Indian equities cooled after September 2024 following a prolonged rally. “Concerns around valuations, a reset in earnings expectations, and general investor fatigue led to a time correction. Subdued 12-month returns and a lack of momentum tempered direct equity flows,” says Ajay Menon, managing director and chief executive officer – wealth management, Motilal Oswal Financial Services. 

Besides market-led factors, behavioural issues such as fear, impatience, and shorter investment horizons have also played a part. 

Regulatory changes in the derivatives segment have also contributed. “Changes like ending weekly contracts and raising lot sizes on index derivatives have impacted participation,” says Sandip Raichura, chief executive officer – retail broking and distribution, and director, PL Capital.

 

Newcomers and small-ticket investors who entered during the last upcycle have exited. “HNIs have largely remained invested. Many have used this phase to accumulate quality names in what has become a stock-picker’s market,” says Menon.

 

Bull market follies 

Investors commit several mistakes during a bull phase that affect them when the inevitable downturn arrives. Many commit the behavioural error of buying high and selling low. “They enter the market during a bull run, driven by euphoria and the fear of missing out (FOMO), and then exit in panic when markets stagnate or correct. This behaviour locks in losses and causes them to miss out on critical long-term opportunities,” says Om Ghawalkar, market analyst, Share.Market.

 

Many purchase stocks without conducting research or building conviction in them. This causes them to lose conviction when prices turn against them.

 

Avoiding leverage is also crucial. Raichura says only then will investors be able to hold on to their purchases through weak phases and benefit from India’s long-term growth story.

 

“Investors chase momentum, overpay, ignore fundamentals, and assume that gains are permanent,” says Harsh Vira, chief financial planner and founder, FinPro Wealth.

 

Exiting during a weak phase carries a high cost. “It means losing the chance to buy quality stocks at lower valuations, reducing average purchase cost, and benefiting from compounding. Such investors also miss out on the inevitable market recovery and subsequent growth phase,” says Ghawalkar.

 

Is direct investing right for you? 

The direct investing route is right for some investor profiles. “Individuals with a longer investment horizon (young to middle-aged), stable income, a reasonable knowledge base about markets, and the time to research and monitor their portfolios may go for direct investing,” says Ghawalkar.

 

This route is not for everyone. “Retirees with fixed incomes and those unfamiliar with markets should avoid direct equities,” says Ghawalkar.

 

Risk-averse investors should also steer clear. “Anyone who cannot tolerate a 20 per cent downturn every two years should be careful,” says Raichura. Vira adds that investors with short-term cash needs, limited finances, or insufficient time to research should avoid direct equities.

 

“Direct equity investing demands process, patience, and ongoing monitoring that many new investors underestimate,” says Menon.

 

Instead of exiting in panic, investors should review the fundamentals of the stocks in their portfolios. “Replace the underperformers that have not held up well,” says Raichura. Ghawalkar suggests shifting to quality, well-researched stocks, while Vira recommends staying invested with a long-term horizon to ride the next upcycle.

 

Why MF flows have held up 

Even as direct equity flows have slumped, inflows into mutual funds via systematic investment plans (SIPs) remain robust. “SIPs enforce automated discipline and rupee-cost averaging, reducing timing mistakes,” says Menon.

 

Mutual funds also offer the benefits of diversification, professional management, and goal-based investing, making them more suitable for first-time and time-constrained investors.

 

Adopt a hybrid approach 

Seasoned investors may benefit from combining both routes. “A core portfolio of mutual funds can provide diversification and liquidity,” says Menon.

 

At the same time, investors may hold direct equities in their satellite portfolio where they can target market-beating returns. “Direct equities allow investors to participate fully in India’s growth story, benefit from lower costs, and capture alpha opportunities beyond what passive or pooled vehicles can deliver,” says Menon.

 

He suggests a focused portfolio of 12–15 quality stocks with a medium- to long-term view. According to him, the current consolidation offers a good opportunity to accumulate fundamentally strong companies.

 

The writer is a Mumbai-based independent journalist

 

Traits of a good equity investor

• Ability to conduct research and analyse financial health of chosen sectors and companies
• Invest based on conviction and analysis instead of following the herd
• Practise risk management
• High risk appetite, discipline to withstand volatility
• Long-term orientation