Domestic institutional investors (DIIs) are tightening their grip on the market, with their bets increasingly focused on sectors linked to India's domestic growth story rather than those dependent on external demand, analysts said.
DII ownership in the Nifty 500 touched an all-time high of 21% in June, with investors raising exposure in 14 of 24 sectors, trimming it in six, and leaving four unchanged.
On a year-on-year (y-o-y), DIIs raised their weights in healthcare, automobiles, capital goods, NBFCs (non-banking financial companies), PSU banks, telecom, retail, and utilities, while reduced their exposure in technology, consumer, oil & gas, cement, chemicals, and insurance, according to a report by Motilal Oswal Financial Services.
For fund managers running large, diversified or flexicap funds, deploying capital is often a practical challenge. Large investments naturally gravitate towards liquidity-driven sectors such as banking, financial services and insurance (BFSI), autos, IT and telecom, which can absorb sizeable inflows.
While a steady pipeline of initial public offerings (IPOs) can expand the investment universe, much of the capital still finds its way into established, liquid names, said market experts. As a result, while stock selection reflects conviction, their sector choices are shaped as much by market liquidity as by broader economic trends, they believe.
“Rising ownership tells us where the domestic money is being absorbed but active weights versus relevant benchmarks would tell us more about what DIIs genuinely believe,” said Hari Shyamsunder, vice-president & senior institutional portfolio manager–India equities, Templeton Global Investments. However, some of the sector choices where weights are increased are understandable and are reflective of a pick up in the economic cycle, he added.
Market participants said the sectors attracting DII interest have one thing in common - they are closely tied to India's domestic growth story rather than external demand. Private and PSU banks are expected to benefit from healthy credit growth and resilient asset quality, while real estate and automobiles stand to gain from lower borrowing costs and steady domestic consumption. Telecom appears to be a long-term digital infrastructure play, whereas healthcare and technology are increasingly emerging as selective quality bets rather than cyclical trades.
On the flip side, Motilal’s report showed that the top 5 sectoral holdings of DIIs in the Nifty 500 accounted for 59.6% of the total allocation – BFSI (29.4%), automobiles (7.9%), consumer (7.6%), capital goods (7.4%), and oil & gas (7.3%).
That raises a pertinent question: Is it a reflection of high conviction, or does it increase portfolio risk if the macro environment turns?
“I wouldn't necessarily describe it as concentration, because BFSI itself accounts for roughly 27% of the BSE 500,” Rohit Sarin, co-founder, Client Associates, said. In many ways, DII allocations are reflective of the market's composition rather than an outsized sectoral bet. However, it also signals conviction. BFSI remains the primary transmission mechanism of India's economic growth, so if credit expands, investment accelerates and consumption remains healthy, financials are naturally positioned to benefit.
The risk, however, is not the allocation itself but the macro environment. If growth disappoints, asset quality deteriorates or the interest rate cycle turns adverse, financials could face headwinds, he noted. Given their significant index weight, that would inevitably have a meaningful impact on portfolios. “So, while the current positioning appears justified, maintaining diversification across sectors remains important as the economic cycle evolves.”
Sustained domestic inflows give fund managers the flexibility to express active views, but managing large pools of capital also makes liquidity an important consideration, said Sarin. As a result, large and liquid sectors such as BFSI naturally attract a bigger share of flows. At the same time, he noted that the allocation pattern reflects conviction, with flows concentrated in sectors backed by improving domestic fundamentals, easing geopolitical concerns, resilient consumption and expectations of a supportive rate environment.
According to Umeshkumar Mehta, chief investment officer, SAMCO Mutual Fund, if the macro environment shifts through a credit slowdown, regulatory tightening or a liquidity squeeze, a portfolio dependent on a handful of sectors will see sharper drawdowns than one that is diversified not just across sectors but also across different types of companies within each sector.
Under-owned bets
DIIs remain relatively cautious on sectors with uncertain earnings or high capital intensity, including energy (especially upstream oil & gas), metals and mining, and capital goods, said Mehta, while adding that many consumer discretionary pockets (durables, media and electronics manufacturing), along with utilities and parts of manufacturing, also remain under-owned due to volatility and execution risks.
He added that even within financials, select NBFCs and insurance segments are only gradually catching up. “Overall, domestic funds are chasing visibility and scale, avoiding areas where growth or balance sheets remain unclear.”
On under-owned opportunities, Shyamsunder believes selective consumption opportunities could be looked at, where expectations have been reset and even a moderate recovery in demand or margins could produce earnings surprises.