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DII Flows into Equity Hit 10-Month Low in February
Domestic institutional investors (DIIs), primarily driven by mutual funds, have played a crucial role in supporting Indian equities, particularly since September 2024. This period marked a significant withdrawal of foreign funds amid concerns about slowing earnings growth and inflated share valuations.
February Sees Significant Decline in DII Flows
In February, domestic institutional flows into stocks hit their lowest level since April 2025. The reduced interest can be attributed to several factors:
– Flows into equities have declined due to lackluster returns over the last 18 months.
– There has been a noticeable shift towards precious metals, which have outperformed traditional equity products.
According to provisional data, domestic investors, including mutual funds, insurance companies, pension funds, and treasuries, purchased shares worth ₹26,130.3 crore this month. This marks a reduction of over 50% compared to their average purchases over the past six months. Recent months have seen DIIs maintaining substantial investments, ranging between ₹69,000 crore and ₹79,000 crore.
Market Performance and Investor Sentiment
The fluctuation in market performance, particularly in mid- and small-cap stocks, has impacted investor confidence. Notably, in January, mutual funds doubled their allocation to precious metals, capitalizing on soaring prices for silver and gold. For the first time, monthly investments into gold and silver schemes surpassed those into equity funds, highlighting a shift in investor priorities.
Rupen Rajguru, Head of Equity Investment and Strategy at Julius Baer India, stated, “Flows chase returns, and unfortunately, the Indian markets have delivered tepid results over the last 15 months. He noted that much of the domestic inflow has previously targeted midcaps, small caps, and thematic funds, which have recently underperformed, influencing current investment dynamics.
Impact of External Markets
The Indian market’s struggles are further underscored by the performance of global counterparts. For instance:
– The Nifty and Sensex indices have declined by 2.7% and 4.2%, respectively, since September 2024.
– The Nifty Midcap 150 index fell by 1.3%, while the Nifty Smallcap 250 index plummeted by 13%.
Siddarth Bhamre, Head of Research at Asit C Mehta Intermediates, emphasizes that markets draw liquidity through performance; the current underwhelming results may have contributed to diminished mutual fund inflows. However, it remains uncertain whether this trend represents a mere pause or a significant shift.
Shifting Investor Tactics
As foreign investors resumed purchases of ₹895.6 crore in February, there are signs of cautious optimism. Rajguru remarked, “Foreign flows have been gradually increasing following the US-India deal framework. The worst of foreign outflows appears to be behind us, with some foreign capital expected to flow into India.” Since October 2024, foreign investors have sold shares worth over ₹4.02 crore, while domestic investors have purchased over ₹10.6 lakh crore in the same period.
Despite this, analysts indicate that competing emerging markets like South Korea and Brazil present more lucrative opportunities. “The pause by overseas investors reflects a change in strategy. The aggressive sell-offs may be subsiding as India’s relative underperformance compared to global peers makes it a reasonable bet,” Bhamre concluded.
Conclusion
As DII flows into equities hit a 10-month low, the Indian market finds itself at a crossroads. The shift towards precious metals and the underperformance of domestic equities continue to shape investor decisions. The future may bring resurgence, but clarity hinges on how these flows will adapt amidst ongoing volatility in both local and international markets.