Foreign portfolio investors (FPIs) outperformed Indian mutual fund managers on rupee returns last year, even though they pulled out a then $27 billion from the country's equity markets. This is mostly explained by the composition of their portfolios , largely Nifty top 50 -100 stocks, which outperformed mid- and small-cap benchmarks.
Though the tables have turned in the first quarter of the current calendar year with the broader markets outperforming the Nifty, it's still early days.
To be sure, the picture on FPI returns undergoes a sea change when adjusted for the steep rupee depreciation, which would adversely impact their returns. The rupee weakened by around 5% in 2025 and by 5.5% in the March quarter.
In 2025, a year marked by tepid earnings growth amid high valuations, supply chain disruptions induced by Trumpian tariffs, and slowing urban consumption, FPI equity assets grew by ₹3.1 trillion to ₹74.26 trillion from the previous year, despite selling ₹2.4 trillion in secondary markets.
This implies an unrealised gain of ₹3.1 trillion and a realised gain of ₹2.4 trillion, translating into a 7.7% return ( ₹5.5 trillion) on assets in the last calendar year.
In the case of MFs, equity assets grew by ₹7 trillion year on year to ₹45.65 trillion in 2025. However, this included record inflows of ₹5.3 trillion, implying an unrealised return on assets under management of ₹1.7 trillion, or 4.4%, 330 basis points below FPIs' return.
Why large-cap stocks made all the difference
A top honcho from a fund house attributed this to Nifty outperformance and MFs buying across price points in a volatile year.
"There is a composition reality—FPI portfolios are heavily skewed towards large caps, the top 50 or 100 names," said Swarup Mohanty, vice chairman and CEO, Mirae Asset Mutual Fund. "These FPI-heavy stocks recovered sharply in the latter part of the year. MF AUM reflects a far wider market, mid caps, small caps, thematic funds, segments that had a more uneven journey through 2025."
To be sure, the Nifty 50 rose 10.5% to 26,130 in 2025, against a 5.37% rise in the Nifty Midcap 150 to 22,276.9 and a negative 6% return of the Nifty Smallcap 250 index to 16,684.75.
Despite broader market underperformance, MFs continued to deploy money raised through systematic investment plans (SIPs) each month at various price points, even when markets were unattractive.
The tables turned in the first quarter of the current calendar year through March, when FPI assets declined by ₹11.7 trillion to ₹62.47 trillion due to a fall in asset value, with the Nifty tumbling by 14.5% to 22,819.6 and a net sale of ₹1.41 trillion. This implies a negative return of 14% or ₹10.4 trillion.
The tables turn
MF assets fell by ₹4.69 trillion to ₹40.96 trillion over the same period. This happened despite a net inflow of ₹1.6 trillion, implying a negative return of ₹6.29 trillion, or 13.8%, a shade better than the 14% fall in FPI returns.
This was largely because broader markets outperformed the Nifty during the quarter.
While the Nifty fell 13.91 to 22331 between December and March end, Nifty midcap 150 fell 11.93 to 19430 between December and March and the Nifty smallcap fell 13.3% to 14288 between December and March end.
FPI and MF data are taken from National Stock Depository Ltd (NSDL) and Association of Mutual Funds in India (Amfi).
"FIIs are concentrated in the top 100-150 companies, largely large-caps. Mutual funds, meanwhile, have substantial exposure beyond the top 150 companies, including mid- and small-caps. In the first quarter of 2026, mid- and small-caps have outperformed large-caps while FIIs have continued to hold largely large-cap stocks," said Jay Kothari, head of global business and lead investment strategist at DSP Asset Managers.
Kothari attributed the FPI exits to tepid earnings growth expectations and to better value in markets such as Taiwan and South Korea, which recently surpassed India as the fifth- and sixth-largest by market capitalization.
Flows pattern unlikely to change
Kotak Institutional Equities said in a note on Sunday that its base-case scenario is for the Strait of Hormuz to reopen by mid-June, while the adverse case is for the chokehold on Hormuz to persist for several months. In the base case, crude would average $95 a barrel this fiscal year, and in the adverse case, $105 a barrel.
"We expect retail investors' sentiment to stay buoyant but foreign portfolio investors' sentiment to stay subdued in our base case scenario and turn more cautious in our adverse case scenario," said Sanjeev Prasad, managing director and co-head, KIE.
FII flows are likely to return only when the rupee stabilises, and the AI trade loses steam, said Daylynn Pinto, senior fund manager—Equity, Bandhan AMC.