India Market Premium Dips: Foreigners Exit, Domestic Funds Rise
By Market Desk
India’s market premium is declining as foreign investors grow cautious, while domestic mutual funds see increased investment despite weakening returns. Explore the changing investment landscape.
India’s investment landscape presents a stark dichotomy: domestic investors continue to pour funds into mutual schemes even as returns weaken, while global financiers increasingly view the market with caution. This divergence marks a potential shift in the long-held narrative of India’s unyielding growth allure.
The domestic mutual fund industry witnessed a significant tripling of schemes delivering negative annual returns to 731 in FY 2025-26, up from 243 a year prior. Concurrently, schemes yielding over 10% returns declined from 304 to 198. Despite these indicators of weakening performance, Indian households maintain robust confidence in the market.
Key Domestic Investment Metrics
- Mutual fund assets under management (AUM) rose 12.2% to Rs 73.7 lakh crore by March 2026.
- Unique investors increased by 13.2%, reaching 6.1 crore.
- Average monthly net SIP contributions jumped 25.8% to Rs 16,413 crore.
Internationally, a Bank of America survey of 98 fund managers, collectively overseeing $272 billion, revealed a cooling sentiment towards India. The survey identified India as Asia’s ‘least-preferred’ stock market, with 32% of respondents holding an underweight position. Indonesia has now surpassed India in investment preference.
Foreign Investor Concerns
- Perceived lack of clear exposure to the artificial intelligence (AI) investment boom.
- Concerns over weak growth and high valuations.
- A perceived absence of critical reforms.
Despite this shifting sentiment, Indian equities still attracted over $4 billion in foreign investment this quarter. However, the overall trend indicates global capital is becoming more selective, with other emerging markets actively competing for investment flows. The focus has transitioned from the certainty of India’s growth to how much of that growth is already priced into its asset valuations.
To sustain its investment appeal, India must prioritize strengthening its underlying economy. This requires faster productivity growth, deeper reforms, increased innovation, and the development of stronger companies with improved earnings. Markets ultimately demand concrete results, not just investment announcements, to justify current valuations.