Smart money leaving India? What foreign fund flows mean for your investment

Foreign money is still flowing into Indian equities, but the nature of that money has changed. For now, global investors seem to be playing it safe

If you’ve been watching the stock market over the past few months and wondering why Indian equities are moving up and down despite strong earnings and reforms, the answer lies  on Wall Street.

 

Since US President Donald Trump’s tariff announcement in April 2025, foreign investor sentiment toward India has changed noticeably. And that shift could have long-term implications for your mutual funds, SIPs, and direct stock investments.

 

So, what changed?

Global investors, particularly “smart money” players like long-only, India-specific discretionary funds, are pulling back from India, shows an analysis by Elara Capital.  These funds typically invest based on long-term conviction—such as India’s consumption story, demographic edge, or digital growth. Their pullback is a signal that foreign investors are being cautious about betting big on India for now.

 

 

 Instead, global capital is increasingly flowing into macro-driven passive vehicles such as Exchange-Traded Funds (ETFs), reflecting a risk-off stance across Emerging Markets (EMs).

 

In simple terms, global investors are saying: “We’re not yet convinced enough to invest in India’s future. For now, we’re riding the Emerging Markets wave, and India just happens to be part of it.”

 

How much money are we talking about?

According to EPFR, a global fund tracker, nearly $390 billion of Indian assets are held by foreign investors through various channels. This represents about 40% of total FII (Foreign Institutional Investor) holdings in Indian markets, which stand at around $980 billion.

 

Breaking Down $390 Billion in Foreign-Owned Indian Equities

 

50% of these assets are managed by Global Emerging Market (GEM) funds

 

Just 25% are held by India-focused active funds

 

U.S.-domiciled funds make up 49% of total foreign ownership, mostly via active strategies 

Among these, Category 4 (long-only, discretionary allocations targeted specifically at India) represents what can be considered “smart money”— capital that reflects high-conviction, long-term bets on India’s structural economic growth rather than sho

 

Among these, India-Focused Active Funds are considered the most reliable barometer of long-term conviction. These funds don’t just follow the trend—they make deliberate bets on India’s growth potential. When they exit, it often reflects reduced belief in the medium-term India story.

 

This “smart money” remained robust through 2023 and into October 2024. However, following Trump’s electoral victory and subsequent tariff threats, this segment saw a wave of redemptions extending into Q1 2025. 

Is the smart money exiting India? India dedicated long-only flows stay weak since start of CY25

. While the earlier rally was powered by long-only active investors (in 2023-2024 period)— typically seen as high-conviction, "smart money" — the recent trend shows a complete rotation into ETF-driven flows

 

Post-April 2025, rather than a return of conviction-driven flows, capital has rotated into ETFs. These vehicles typically mirror broader EM sentiment and macro signals rather than country-specific fundamentals. 

"While the earlier rally was powered by long-only active investors (in 2023-2024 period)— typically seen as high-conviction, "smart money" — the recent trend shows a complete rotation into ETF-driven flows. This suggests a move from fundamental-driven investing to a more tactical, top-down allocation. The absence of active fund participation raises questions about the strength and sustainability of foreign investor conviction in India’s medium-term growth story. Foreign active fund redemptions in India-focused long-only strategies — seen for the first time after Apr’18 — have resurfaced post Jan’25, exerting pressure on the market breadth. This pattern echoes similar strategic shifts by foreign active investors during Mar’07 and Apr’11, both of which were followed by notable breadth deterioration in the market," said Sunil Jain of Elara Capital. 

Why does this matter?

 

ETF flows indicate a top-down, tactical approach—where India is just part of a basket

 

The absence of active fund participation suggests lower foreign confidence in India’s near-term earnings, valuations, or political clarity

 

Notably, foreign active fund redemptions in long-only India strategies have returned for the first time since April 2018, echoing previous shifts seen in Mar 2007 and Apr 2011—both of which were followed by weak market breadth and broader corrections. 

Is Smart Money Already Leaving India?

All signs point to a “risk-off” mode:

 

Passive ETF flows are dominating

 

India-focused funds are withdrawing quietly

 

Global investors are moving capital out of high-valuation India and back into China, which now offers contrarian appeal due to relative underperformance

   

"Moreover, this pattern is not unique to India; similar allocation behaviour is evident across broader Emerging Markets (EMs), signalling that current inflows are largely macro allocations to the EM asset class rather than targeted investments in individual economies," said the report.

   

Why are investors pulling back?

Two major reasons:

 

Political Risk: Trump’s return and his protectionist trade policies have made global investors jittery. Tariffs often lead to uncertainty in export-heavy economies like India and affect global capital flows.

 

Dollar Strength: The U.S. Dollar Index (DXY) has rebounded above the key 100 level. A strong dollar usually means money flows out of Emerging Markets and into the U.S., seen as a safer haven. That spells trouble for Indian stocks, especially foreign-funded ones.

 

Now, with the dollar staging a comeback, crowded long-EM positions, including those in Indian equities, are at risk of unwinding. A sustained move above the 100-mark could accelerate outflows, especially from passive strategies that entered on macro signals. 

Investor Pullback? 65% of India active funds witnessing outflows since Jan’25

 

Source details: EPFR, Elara Securities, Research, Bloomberg, Capital Line, ACE MF

 

Outlook

With ETF flows vulnerable to swift reversals and conviction-based “smart money” still on the sidelines, India’s foreign investment outlook remains delicate.

 

Unless clarity emerges on U.S. trade policy and dollar direction, investor preference may continue tilting towards tactical rather than transformational exposure—leaving India caught in the crosswinds of global macro churn. 

EM Rebalancing: Is China Making a Comeback?

Between 2021–2024, global capital rotated aggressively into India at the expense of China. India saw a flood of active and passive flows due to strong earnings, political stability, and digital growth narratives.

 

But 2025 tells a different story:

 

Investors are now rebalancing from India to China, possibly driven by:

 

Policy support and earnings rebound in China

 

Cheaper relative valuations

 

Contrarian positioning by fund managers

 

For example, China A-shares’ inclusion in global indices like MSCI (since 2018) had triggered sharp capital shifts. After several years of underperformance, global managers are gradually rebuilding exposure to China, while trimming crowded India bets. 

What This Means for Your Portfolio

If you’re a retail investor, here’s how to interpret all this:

 

 Do This

Review your exposure to India-heavy mutual funds—especially mid/small-cap ones with high foreign ownership

 

Maintain diversification across asset classes—including debt, gold, and international equity

 

Continue your SIPs and long-term plans, especially if your goals haven’t changed

 

 Avoid This

Don’t panic-sell based on temporary foreign exits

 

Don’t chase hot sectors or stocks with high FII ownership

 

Don’t assume ETF inflows mean conviction—it often means index-level buying, not fundamental belief