The numbers appear to support the claim. Since September 2024, FPIs have been heavy sellers, culminating in record net outflows of $19.6 billion in 2025-26 (FY26). Domestic institutional investors, meanwhile, bought nearly $96 billion worth of equities. Foreign ownership in companies listed on the National Stock Exchange (NSE) has fallen to levels last seen two decades ago, while DMFs have steadily increased their share.
Yet this popular narrative rests on a questionable assumption — that FPIs and DMFs have been buying and selling the same stocks. Foreign investors remain overwhelmingly concentrated in India’s largest companies, while domestic fund flows are increasingly directed towards midcap and smallcap stocks. What appears to be one market absorbing a wave of foreign selling is, in reality, two different markets moving in opposite directions.
The Indian stock market was opened to foreign institutional investors in September 1992. The following year, India’s first private-sector mutual fund (MF) opened for subscription. Over the next two decades, foreign investors came to dominate the market while domestic MFs struggled to build investor confidence. Through the stagflationary 1990s, the dotcom bust of 2001, the commodity and infrastructure boom of 2003-07, the global financial crisis of 2008 and the subsequent recovery, FPIs largely determined the direction of the Indian stock market. When they sneezed, India caught a cold. At their peak in FY14, they owned 22.1 per cent of all stocks listed on the NSE.
Throughout this period, concerns were frequently raised that Indians were not participating adequately in the wealth being created by their own stock market. Foreign investors appeared to be capturing a disproportionate share of the gains.
Then something changed. DMFs, whose ownership had remained stuck below 4 per cent for years, began attracting far larger inflows after demonetisation. While foreign ownership hovered around 21 per cent, domestic ownership steadily rose. Following the two-year bull market between September 2022 and September 2024, the divergence became more pronounced. FPI ownership fell to 17.5 per cent by March last year and then to 15.8 per cent by March this year — the lowest level since March 2006. Meanwhile, DMF ownership rose to 10.4 per cent.
The January-March quarter (Q4) of FY26 highlighted the trend. Of the record $19.6 billion in annual FPI outflows, nearly $14.2 billion occurred during the quarter, following United States (US) President Donald Trump’s tariff announcements and the Iran war. Over the same period, domestic institutional investors purchased $95.8 billion of equities. To many observers, this represented a structural shift in India’s capital markets. The country had finally developed a domestic-investor base capable of offsetting foreign withdrawals. Union Finance Minister Nirmala Sitharaman repeatedly argued that retail investors had become a shock absorber, reducing the market’s vulnerability to foreign capital flows. There is truth in that claim — but only up to a point. The aggregate ownership data conceals an important distinction. FPIs remain heavily concentrated in the largest companies. At the end of FY26, 92 per cent of their NSE holdings were in the top decile of listed firms by market capitalisation. DMFs were somewhat more diversified, with 87.8 per cent in the top decile and a larger allocation to smaller companies.
The difference becomes clearer when fund flows are examined. During Q4FY26, equity MFs attracted more than ₹90,000 crore of net inflows. Midcap and smallcap schemes alone received over ₹26,000 crore; largecap and midcap funds attracted another ₹11,600 crore. Pure largecap funds received only ₹7,114 crore, much of it directed towards passive products. Retail investors, in other words, are increasingly allocating capital to segments of the market where FPIs have traditionally had limited exposure. This helps explain one of the curiosities of the past year. Since September 2024, the Nifty 50 has fallen 6.7 per cent. Yet the Nifty Smallcap index is down only 3.8 per cent and the Nifty Microcap index 2.9 per cent. If domestic investors were merely absorbing foreign selling, one would expect similar performance across market segments. Instead, the divergence reflects differing ownership structures and differing sources of demand.
This is not to suggest that FPIs and DMFs inhabit entirely separate universes. Both invest across market capitalisations. But their preferences differ markedly. FPIs remain concentrated in megacap banking, software and pharmaceutical companies, many of which have delivered modest earnings growth. Domestic fund managers, buoyed by relentless SIP inflows, have increasingly gravitated towards fast-growing businesses in pharmaceuticals, defence, precision engineering, power equipment and other midcap sectors.
The result is that FPI selling and DMF buying have not been mirror images of one another. Foreign investors have largely been exiting one part of the market while domestic investors have been enthusiastically accumulating another. There is another flaw in the argument that retail investors have neutralised the impact of FPI selling. When FPIs sell Indian stocks, their action weakens the rupee, as we have seen last year. DMFs, in contrast, invest in rupees; their buying can support stock prices but does not bring in foreign exchange or strengthen the currency. India has certainly become much less dependent on FPIs than before. But the idea that retail investors have simply absorbed foreign selling is flawed in multiple ways.
The author is cofounder of www.moneylife.in and a trustee of the Moneylife Foundation; @Moneylifers
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