Retail flows surge, returns don't: Kotak decodes costly stocks, flat market

What Kotak's Strategy Note Means for Your Money: Patience Until FY27

Flat Markets, Heavy Flows: What Kotak’s Strategy Note Means for Your Money

 

Over the past year, Indian equity markets have puzzled many retail investors. Despite pouring in record sums through mutual funds and insurance-linked equity schemes, investors have little to show for it. According to Kotak Institutional Equities’ latest Strategy Report, domestic institutional investors (DIIs) invested nearly $90 billion in the secondary market in the past 12 months, yet the Nifty 50 delivered almost zero returns .

 

This paradox—massive inflows but flat markets—raises important questions. Should investors continue with their SIPs? Is the era of high equity returns over, or is this just a temporary pause?

 

 

Retail Euphoria Meets Market Reality

 

Kotak points out that retail euphoria has been evident in the strong inflows into mutual funds, particularly equity and hybrid schemes. Data shows equity mutual funds saw inflows of ₹2.7 trillion in CY2025 alone . Insurance companies too have contributed to equity demand.

 

Yet, flows have not translated into returns. Kotak bluntly notes that the “belief in flows as a driver of markets” has been disproved. The report stresses that investors—both institutional and retail—need to refocus on fundamentals like earnings and valuations, rather than assume that steady inflows guarantee rising indices. 

The Indian market has been flat over the past 12 months

 

Most sectors have delivered negative returns in the past 12 months

For the average SIP investor, this means resisting the temptation to chase “themes” and instead ensuring asset allocation remains aligned to long-term goals. 

India has underperformed most global markets in the past 12 months, but has outperformed in the past five years

 

Fundamentals have been the real drag on the market

"We attribute the weak market performance over the past 12 months to expensive valuations for most sectors and stocks, valuations have stayed at high levels, despite several stocks being flat or down over this period due to constant earnings downgrades and earnings downgrades in several sectors and stocks over the past 12 months, which have kept valuations high," said the strategy note. 

 

Kotak estimates that Nifty earnings growth will be just 9.4% in FY2026 but accelerate to 17.6% in FY2027 . Nifty EPS is expected to rise from ₹1,093 in FY26 to ₹1,297 in FY27, before hitting ₹1,488 in FY28 .

 

This earnings recovery, however, is not evenly spread. Kotak models:

 

Banks and NBFCs: Recovery in loan growth, net interest margins (NIMs), and lower credit costs.

 

Automobiles: A rebound supported by GST cuts, which boost demand volumes.

 

Consumption: Gradual recovery, though still subdued.

 

Investment & Capex-driven sectors: Only moderate improvement, with weak private sector capital expenditure still a drag.

 

IT services: Modest rise, but global demand weakness persists .

 

In other words, while some sectors may start contributing meaningfully from FY27, investors must brace for muted performance in FY26.

 

Valuations Still Rich

 

Even with earnings growth expected to recover, markets remain expensive. The Nifty is trading at:

 

22.9x FY26 estimated EPS

 

19.3x FY27 estimated EPS

 

16.9x FY28 estimated EPS

 

This is well above the historical average, suggesting little margin of safety. “Valuations have stayed at high levels despite several stocks being flat or down,” Kotak observes .

 

For investors, this underscores the need for caution—especially in mid- and small-caps, where volatility is sharper.

 

Macroeconomic Backdrop

 

Kotak expects the Indian economy to remain stable:

 

Real GDP growth: 6.5% annually through FY26–28.

 

Inflation (CPI): 2% in FY26, rising to 4% in FY27 and FY28 .

 

The RBI has cut repo rates by 100 basis points over the past year, providing monetary stimulus . Fiscal measures such as income tax cuts and GST rationalization have also left households with an additional 0.6% of GDP as disposable income, roughly ₹1.9 trillion .

 

Despite this, weak corporate earnings have offset macro tailwinds. For households, the benefit of lower taxes and GST cuts should help boost consumption, but equity investors may need to temper return expectations.

 

Narratives vs Reality

 

The Kotak report also cautions against chasing market “narratives.” In recent years, themes such as China+1 manufacturing, privatization, and electric vehicle adoption have excited investors. Yet, progress has been limited. For instance:

 

Privatization: Little progress despite expectations around the 2024 elections.

 

EV adoption: Pace of electrification has been weak.

 

Capex revival: Private sector GFCF/GDP has remained flat at ~11% over FY2020-24 .

 

Global & Currency Factors

 

Indian equities have underperformed most global markets in the past year, though they continue to outperform over a 5-year horizon . The rupee has depreciated 5.5% against the US dollar in the past 12 months, which helps export-oriented earnings but reduces USD-denominated returns for foreign investors .

 

For NRIs and those with overseas obligations, the weaker rupee can be a double-edged sword: better returns on dollar remittances but higher costs for foreign education or travel.

 

Kotak’s strategy note offers several takeaways:

 

Stick to SIPs, but reset expectations: Markets may stay range-bound in FY26, with stronger earnings growth only from FY27. Patience is essential. 

 

Diversify across asset classes: With equities expensive, increasing allocation to debt funds, target-maturity funds, or even gold ETFs may balance risk.

 

Avoid chasing themes: Narratives like privatization or EVs may sound exciting but are not translating into consistent earnings. Focus on sectors with visible cash flows—banks, autos, and select consumption plays.

 

Valuations matter: Even if earnings pick up in FY27, buying at high P/Es could reduce long-term returns. Consider staggered investments or value-focused funds.

 

Use GST & tax savings wisely: The estimated ₹1.9 trillion benefit from tax/GST changes is an opportunity to increase savings rather than raise discretionary spending.

 

Prepare for volatility: With small- and mid-caps already down 2–7% in the past year , investors should be cautious of overexposure.

 

"We expect a gradual earnings improvement over the next few quarters and strong earnings growth in FY2027. However, valuations are rich, despite our strong expected earnings recovery. We model (1) a recovery in earnings of banks and NBFCs after a weak 1HFY26 due to a pick-up in loan growth and NIMs and a decline in credit costs and (2) a rebound in earnings of certain consumption sectors (automobiles) due to GST cut-led volumes, offset by (3) a moderate increase in earnings of the investment sector, given continued weak capex and investment demand and (4) a modest rise in earnings of the IT services sector, given the continued weak demand environment," said the note.  Disclosure: Entities controlled by the Kotak family have a significant holding in Business Standard Pvt Ltd