The report describes the current phase as a “game of patience,” where sustained systematic investing is being tested by weak trailing returns and heightened market volatility.
How retail behaviour is holding up despite weak performance
According to Kotak Institutional Equities, retail investors have continued to invest through Systematic Investment Plans (SIPs) and have also added lump-sum allocations during market dips, even after a sharp correction in March 2026.
Gross SIP inflows have shown a steady upward trend, while SIP account numbers have remained broadly stable in CY2026 so far. This indicates continued participation from retail investors despite muted market performance.
At the same time, the report highlights a divergence in investor behaviour, with participation in direct equity investing showing signs of fatigue. The active retail investor base declined in FY2026, suggesting a gradual slowdown in the do-it-yourself investing trend seen over FY2021–FY2025.
Why returns have failed to match inflows
Kotak Institutional Equities notes that despite strong cumulative inflows into equity mutual funds, investor returns have been disappointing.
The weighted-average net asset value (NAV) of equity-oriented mutual funds has declined from peak levels, with many investors experiencing negative or weak internal rates of return on investments made between July 2024 and March 2026.
The pressure has been particularly visible in small-cap, mid-cap and thematic funds, which attracted significant inflows during the earlier part of the cycle but have underperformed broader equity indices over the past 18–21 months.
What kinds of flows are driving the market
The report highlights that while total inflows have moderated compared to the peak years of CY2024–CY2025, equity mutual funds have still attracted about ₹1.1 trillion in active inflows in CYTD26.
A notable shift has been the increasing allocation toward passive funds, flexi-cap strategies and multi-asset funds in CY2026. This suggests a gradual tilt toward diversified and lower-volatility investment products.
How domestic investors are offsetting foreign selling
On the institutional side, foreign portfolio investors (FPIs) have remained net sellers of Indian equities, with total equity outflows of around US$19 billion in CYTD26, according to Kotak Institutional Equities.
Selling pressure was observed both during the market correction phase and during subsequent recovery attempts, indicating sustained caution toward Indian equities.
However, domestic mutual funds have largely absorbed this outflow. Strong SIP inflows, steady retail participation, and institutional allocations have helped stabilise markets, even as mutual fund cash levels have declined marginally.
Why global flows remain cautious on India
Kotak Institutional Equities notes that India has underperformed several global and emerging markets in recent months, even as markets such as South Korea and Taiwan have seen improving momentum and stronger passive inflows.
India’s weight in global indices has also declined in recent periods, reflecting relative underperformance versus peers.
At the same time, the report points out that Indian equities continue to trade at a premium to other emerging markets, even as earnings growth remains uneven in the near term.
The outlook: Patience as the defining theme
Kotak Institutional Equities projects Nifty earnings growth at 8.2% for 2025, rising to 18.1% in 2026 before moderating again in 2027.
The report suggests that while domestic inflows continue to provide strong structural support to markets, muted returns, elevated valuations, and continued foreign selling are likely to keep investor sentiment in a consolidation phase.
