Retail investors pull back as markets remain flat; net inflows fell 90%

Retail investors sharply reduce direct equity exposure in 2025, preferring mutual funds and DIIs as market volatility and weak returns weigh on sentiment

With the equity market turning tumultuous, retail investors have sharply scaled back their direct equity investments, even as they steadily shift from traditional savings instruments to equities via mutual funds (MFs).

 

So far in 2025, net inflows from retail investors have totalled ₹12,408 crore, down nearly 90 per cent from ₹1.16 trillion in the January–September 2024 period.

 

The retreat from direct investing contrasts with the strong inflows from domestic institutional investors (DIIs), led by MFs. Other DIIs include insurance companies and pension funds, which channel retail money through systematic investment plans, insurance premiums, and retirement savings schemes.

 

Experts say that as direct investing becomes more challenging, retail investors increasingly prefer structured avenues to deploy their investible surpluses.

 

“The preference for DIIs stems from the lessons every retail investor eventually learns. Direct investing is exciting, but very few consistently outperform the benchmark or an MF. Once that realisation sinks in, more capital flows into MFs, with only a small portion left for direct equity,” said Deepak Jasani, former head of retail research at HDFC Securities.

 

Over the past year, the benchmark Nifty has delivered almost no returns. Market observers say many retail investors lost heavily chasing thematic stock ideas that gained favour during the first nine months of last year. 

 

“During a bull run in mid and smallcap stocks, usually only one or two themes dominate. But in the last cycle, multiple themes caught investors’ fancy, and those stocks crashed after last September. While a recovery began in February, many of these stocks are yet to bounce back fully,” said Chokkalingam G, founder and head of research at Equinomics.

 

Retail investors were net sellers in five of the nine months this year, including net sales of ₹14,325 crore in March — their biggest monthly outflow since 2016.

 

The March selloff followed a market rout in the preceding months and was driven by tax-loss harvesting, a strategy in which investors sell loss-making stocks to offset taxable gains from profitable ones.

 

Selling continued, though at a slower pace, until June, resulting in net sales of ₹10,555 crore between April and June. Retail investors turned net buyers in July and August but have resumed selling so far this month.

 

Some analysts argue that retail flows since September 2024 suggest investors are becoming more savvy, moving away from a passive buy-and-hold approach toward informed short-term bets.

 

“They are booking profits when markets rise and buying when markets dip. This is quite different from the usual retail behaviour of panicking during sharp corrections,” said Amabreesh Baliga, an independent equity analyst.

 

Looking ahead, retail investors are expected to persist with their buy-on-dip strategy.

 

“The markets haven’t corrected much, so they may not be significant buyers this month or next, unless there’s a dip. In the meantime, they will stay cautious and continue allocating to MFs,” said Jasani.