For every rupee FPIs pulled out, Indian mutual funds put in more — and here's exactly where they're investing

When foreign portfolio investors pulled out nearly $14 billion from Indian equities in the first three months of 2026, domestic mutual funds did not blink. They deployed close to $27 billion in the same period — more than absorbing the outflow — according to Navneet Munot, MD and CEO of HDFC AMC. In the process, they have left a clear trail of where India's institutional smart money is going.

The counter-cyclical engine

Monthly SIP inflows have held firm at ₹30,000–32,000 crore in recent months, giving mutual funds a steady supply of fresh capital even as global risk-off sentiment rattled markets. Equity mutual fund net inflows for March 2026 came in at ₹405 billion — the highest in over a year — with Flexi Cap funds attracting the most at ₹100.5 billion, followed by Small Cap at ₹62.6 billion and Mid Cap at ₹60.6 billion, according to AMFI data cited in a YES Securities institutional research report dated April 21, 2026.

"DIIs are playing the counter-cyclical role by deploying money whenever there are global flow disturbances," Siddharth Maurya, managing director at Vibhavangal Anukulkara told Fortune India. "The notable aspect of this is how these institutional players are no longer taking up aggressive positions on high-beta plays but are selectively investing in large-cap and strong balance sheet companies where earnings visibility is intact."

In 2026 so far, DIIs have been net buyers to the tune of over ₹1 lakh crore, absorbing a significant portion of FPI outflows during global risk-off phases, according to Pallavi Desai, head of client relations at Aikyam Capital. "Flows underscore confidence in India's macro stability, reform momentum, and long-term growth trajectory, with capital being deployed in a disciplined, fundamentals-driven manner," she added.

In a written statement to Fortune India on May 7, Navneet Munot frames the FPI exit in a similar way. "Over the past couple of years, FPI outflows have been driven by factors largely external to India — tariff uncertainties, geopolitical realignments, weak currency-adjusted returns and the pull of AI-driven opportunities elsewhere," he says. "Worth noting that this is not a judgment on India's structural trajectory but more of a reaction to global cues and relative valuations."

The big buys: private banks, telecom, capital goods

The numbers tell a precise story. In March 2026, mutual funds collectively added the most to HDFC Bank (₹10,543 crore), Bharti Airtel (₹8,700 crore), ICICI Bank (₹5,148 crore), Eternal (₹3,521 crore), Reliance Industries (₹3,485 crore), IndiGo (₹2,901 crore), Shriram Finance (₹2,173 crore), Kotak Bank (₹1,937 crore), Infosys (₹1,846 crore) and Axis Bank (₹1,532 crore), according to NAV India data compiled by YES Securities.

The pattern is unmistakable — private sector banks dominate the buy list, with nearly ₹22,000 crore deployed into the top four banking names alone. "There are distinct trends of investing in private sector banks, telecoms and capital goods that are highly linked to the growth cycle of India, which are insulated from external shocks," says Maurya. "Besides, there is gradual buildup in manufacturing and infrastructure-related companies that are in line with the capex theme being followed by the Indian government for diversifying its supply chain."

This conviction shows up clearly in the April 30, 2026 monthly portfolio statements of individual funds. Canara Robeco Mid Cap Fund's top holdings as on April 30 include Bank of Maharashtra (2.75% of NAV), Federal Bank (2.44%) and Indian Bank (2.37%). Nippon India Small Cap Fund holds HDFC Bank as its single largest position at ₹1,370 crore — a deliberate quality tilt despite being a small cap mandate.

This is consistent with what the YES Securities report identifies as a structural recovery trade: financials have historically outperformed the Nifty in 8 out of 10 post-correction phases over a three-month window, and in 9 out of 10 instances over six months, based on data going back to 2008.

Munot makes a specific case for large banks. "Large banks with healthy balance sheets, attractive valuations and potentially rising working capital demand could present good risk-adjusted opportunities for long-term investors," he says.

What's being sold

On the other side, mutual funds trimmed BPCL (-₹1,214 crore), MCX (-₹894 crore), GE T&D (-₹787 crore), IOC (-₹784 crore), Federal Bank (-₹618 crore), ITC (-₹550 crore) and Apollo Hospitals (-₹416 crore) in March 2026, according to the YES Securities report.

"The selling has been in those segments where valuations have run ahead of fundamental factors such as commodity-linked businesses and selected PSUs where cyclicality and margins remain sticky," says Maurya. "Further, some profit booking has taken place in mid and small cap stocks following the rally witnessed last year."

The message to retail investors, Maurya argues, is deliberate. "DIIs are concentrating on quality, sustainability of earnings, and valuation — not momentum investing. In an unstable market environment, adopting such a portfolio strategy can help construct more resilient portfolios."

Capital goods, power and metals: the other big themes

Beyond banks, funds are steadily building positions in capital goods, infrastructure and manufacturing. Canara Robeco Mid Cap Fund holds BHEL as its single largest position at 3.17% of NAV, as per its April 30 portfolio statement. Construction Materials have the most consistent recovery track record of any sector, outperforming the Nifty in all 10 historical post-correction instances tracked by YES Securities since 2008.

Desai of Aikyam Capital points to two less-discussed but emerging themes in DII allocation. "Metal companies have seen a good uptick in this volatile macro environment with commodity prices zooming up," she says. "The power sector too has seen good additions due to expectations of the El Niño phenomenon in 2026." She adds that allocation trends show "a clear preference for sectors aligned with the government's policy push, including capital goods and industrials, infrastructure, and manufacturing companies, where earnings visibility remains strong in the time of global supply chain adjustments."

The structural argument

The Nifty's correction of approximately 14.8% over four continuous months has marginally exceeded the historical average drawdown of 13.7%, according to YES Securities. Historically, the index has delivered average returns of ~8% over the three months following such a correction, and ~17.4% over six months. The breadth of domestic buying suggests fund managers are already positioning for that recovery.

"What's heartening is that India now has a domestic capital base, led by SIPs, with the depth and conviction to stay the course when such FPI outflows happen," says Munot. "The breadth, depth and transparency of Indian markets, combined with the economy's long runway of growth potential, could make it a structural destination for investors. While the current momentum in AI and commodity-related themes is strong, India presents a structural and sustainable growth story to global investors." 

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