For much of the past decade, the Indian investment proposition was almost self-evident. Here was the world’s fastest-growing large economy, with a vast population, rising incomes, a modern banking system, a digital economy, and a government willing to spend heavily on infrastructure. China had become difficult for geopolitical and regulatory reasons. Many other emerging markets were either too small or too dependent on commodities. India seemed to offer the rare combination of scale, growth, and relative stability. Indian equities acquired a valuation premium over most emerging markets because the market bought into the promise of tomorrow’s India. The question is: Has that promise disappeared?
The promise has never been brighter in the 35 years since foreign investors were allowed to enter India. But it is in a market segment that foreign portfolio investors (FPIs) have largely ignored, namely, smaller companies. India is witnessing an extraordinary rise in entrepreneurship in sectors with powerful and long-lasting growth drivers: Pharmaceuticals, engineering, capital goods, services, defence, and power infrastructure are among the most important. Their business and stock-market performance have gladdened and fattened the hearts and purses of investors who can see this. So they flocked to these companies. Among such investors are the FPI counterparts — the domestic mutual funds. Let us look at some numbers.
In October 2024, FPI flows turned sharply negative, with an equity outflow of ₹94,017 crore in a single month. Between October 2024 and June 2026, more than $50 billion, or roughly ₹4.5 trillion, was withdrawn by foreign investors from Indian equities. But between October 2024 and July 2026, roughly ₹6.31 trillion entered mutual funds through systematic investment plans (SIPs). The most dramatic period was March 2026, when FPIs sold about ₹1.18 trillion, as the United States (US) and Israel attacked Iran. The markets tanked, while mutual funds bought about ₹98,746 crore. In July 2026, SIPs still brought in ₹31,961 crore, and almost touched an all-time high.
Now, follow this money for more enlightenment. In July 2026, actively managed equity mutual funds received about ₹24,697 crore of net inflows. Of this, only ₹1,322 crore went into largecap funds. Smallcap and midcap funds alone accounted for ₹13,960 crore, or about 56.5 per cent of equity mutual-fund inflows, in July. The same companies I mentioned earlier are enjoying an unprecedented boom. Another ₹3,425 crore went to largecap and midcap funds. The rest went to flexicap and multicap funds. These would also invest a part of their money in smallcap and midcaps. Then there are portfolio management services (PMS), where assets under management have risen from ₹24 trillion to ₹44 trillion. The bulk of the PMS investment is in smallcaps and midcaps.
The stark conclusion is this: Domestic investors are not merely matching FPI selling; they are directing a large proportion of their money towards smallcap and midcaps, where FPIs are less active. Based on a December 2025 analysis, the top 100 companies received 76 per cent of FPI investment, though this was down from 83 per cent in December 2022. Their company ownership, ranked 251-500, has barely budged, from 5 per cent to 6 per cent. Since March 2023, the Nifty Smallcap 250 index has doubled. The Nifty Microcap index is up 150 per cent. Meanwhile, with 31 per cent of their investment in financial stocks and 8 per cent each in software and oil and gas stocks, FPIs are staring at poor to average returns. Now you know why they are sore.
The biggest reason to ignore the FPI gripe is that India’s listed stocks do not have much exposure to the current AI mania. The great investment boom is increasingly being expressed through semiconductors, computing power, networking equipment, data centres, and hyperscale cloud infrastructure. But among countries outside the United States and China, only Taiwan and South Korea can offer a significant exposure to the current AI fashion. No policymaker should lose sleep over this. It would be akin to shunning a country in 1999 because it did not have lossmaking listed internet companies, or in 2007 because it did not have financial stocks minting money from toxic subprime mortgages. You know how that worked out.
Besides, there is another possibility. When the AI hardware boom eventually crashes under the weight of debt-fuelled, manic growth, it may well be Indian software engineers who are still around to build applications and help companies globally use AI to raise productivity.
For these and a variety of other reasons, India should ignore the BofA survey. However, we should pay attention to surveys of business managers. India needs almost $100 billion in net foreign direct investment (FDI), mostly in manufacturing, which will bring in technology, create skills and jobs, and convert India’s domestic scale into internationally competitive production lines. We are not making much of a serious attempt in this direction. If India does get $100 billion a year in FDI, it would be a game-changer in every possible way. FPIs would come rushing back, AI or no AI.
The writer is cofounder of www.moneylife.in and a trustee of the Moneylife Foundation; @Moneylifers
 "Foreign Portfolio Investors (FPIs)")