Domestic institutional investors (DIIs) have set a new high in Indian equities this year, overtaking 2024’s record even with a quarter of the year still left. However, momentum is showing early cracks as returns stagnate and global headwinds cloud sentiment.So far in 2025, DIIs—including mutual funds, insurers, banks and pension systems have net bought equities worth Rs 5.3 lakh crore, topping last year’s Rs 5.22 lakh crore.Mutual funds have been the largest driver with Rs 3.65 lakh crore, aided by monthly SIP flows of over Rs 25,000 crore, while their cash holdings remained elevated at Rs 1.98 lakh crore in August. Insurance companies and pension funds together added over Rs 1 lakh crore, with the rest contributed by PMS, AIFs, banks and others.Despite such strong domestic flows, Indian equities have trailed global markets. In dollar terms, the Sensex has risen just 2 percent and the Nifty 4 percent so far 2025, hampered by weak earnings and stretched valuations.By comparison, the Shanghai Composite has gained 17 percent, the Hang Seng and Topix 20 percent each, while the Dow Jones and S&P500 are up 8 percent and 13 percent. Europe’s FTSE100 has advanced 21 percent, CAC 40 20 percent and DAX 35 percent.The sustainability of mutual fund inflows is under scrutiny. Recent AMFI data shows equity fund inflows fell 22 percent in August to Rs 33,430 crore from July’s record Rs 42,702 crore.Analysts flagged rising redemptions from small-cap and thematic funds as investors booked profits and diverted money into real estate. They also warned that GST rationalisation and festive spending could squeeze household savings, limiting fresh allocations to equities.“Many may not be buying houses, but home renovations are consuming a big share of household budgets. With GST rationalisation, more outflows from mutual funds are likely, as investors use accumulated profits to fund these costs,” experts noted.Industry assets under management (AUM) slipped marginally to Rs 75.18 lakh crore in August from Rs 75.36 lakh crore in July. Analysts see this as a sign of reallocation rather than erosion, suggesting wealth is shifting from financial savings to consumption, reinforcing the view that India’s consumption cycle is entering a high-growth phase.External risks add another layer of pressure. The US has raised H1B visa fees to $1 lakh from $1,000 and revoked sanction waivers on Iran’s Chabahar Port effective September 29, endangering India’s $120 million-plus investment in the project and weighing on investor mood.At the same time, foreign institutional investors (FIIs) remain net sellers, dumping Rs 1.8 lakh crore so far in 2025 after selling Rs 1.21 lakh crore last year. Their shareholding in Indian equities has dropped to 16 percent from 22 percent in 2019, coinciding with India’s 30-percentage-point underperformance versus MSCI Emerging Markets the sharpest since 1996.
