MF equity buying drops to 3-year low in Feb; correction may revive demand

Net equity purchases declined 75% M-o-M to ₹10,381 crore; correction may spur fresh buying

Buying of domestic equities by mutual funds (MFs) dropped to a three-year low of ₹10,381 crore in February, down sharply from ₹42,355 crore in January, amid slowing inflows into equity schemes and heightened market volatility. However, fund managers indicate that the recent sharp correction in the market could prompt them to step up purchases in the coming months as valuations turn more attractive.

 

MF investments in equities are influenced by net inflows into equity and hybrid schemes, changes in cash holdings, and shifts in the equity allocation of hybrid funds.

 

In January, net inflows into equity schemes fell to a seven-month low of ₹24,029 crore. Market participants attributed the slowdown to subdued investor sentiment following weak short-term performance of equity schemes, and a shift in allocations towards relatively safer assets such as gold exchange-traded funds (ETFs) amid rising geopolitical tensions and market volatility. 

Systematic investment plan (SIP) inflows into active equity schemes — which had remained resilient through most of 2025 — also saw a marginal decline during the month.

 

Foreign portfolio investor (FPI) flows turned positive last month after two consecutive months of net selling, allowing some domestic fund managers to take profits. Amid heightened geopolitical tensions and trade uncertainties, a few fund houses also raised cash levels to deploy capital at more attractive valuations.

 

“We have recently increased cash levels with a view to rebuilding equity exposure at lower levels,” Quant MF said in its March equity outlook, adding that easing valuations and growth expectations make India an attractive market.

 

“Through the recent period of correction and consolidation, India’s relative price-to-earnings (PE) multiples have realigned with historical averages and macroeconomic fundamentals. We believe the next phase of India’s bull-run will be supported by an improving earnings revision cycle following structural reforms,” it added.

 

Views among asset managers and brokerages remain divided on the outlook for domestic equities.

 

According to Morgan Stanley, the recent volatility has created buying opportunities. “Indian stocks continue to react more to bad news than good news, creating doubts that structural problems are surfacing for India. We believe this reflects adverse market plumbing and presents an opportunity to buy high-quality businesses at reasonable prices despite the potential for near-term volatility,” the brokerage said in a recent note.

 

However, Kotak Institutional Equities said geopolitical tensions could continue to weigh on sentiment.

 

“The conflict will result in riskoff sentiment until the issue is resolved. The duration, magnitude, and outcome remain highly uncertain and could further pressure India’s macro environment through higher crude oil and gas prices. The Indian market is already grappling with high valuations and concerns over the potential impact of artificial intelligence (AI) on the information technology (IT) services sector,” it said in a report on the US-Iran conflict.

 

While slower inflows and rising cash holdings have curtailed the equity buying capacity of fund managers, increasing equity allocation by hybrid funds could provide some support.

 

Most balanced advantage funds (BAFs) and multi-asset schemes have been gradually raising equity exposure as the recent correction has improved valuations. A Business Standard analysis of BAF portfolios showed that the average equity allocation of the top five schemes rose from 46.4 per cent in September 2024 to 54.9 per cent in January 2026.