Domestic Funds Rapidly Closing Gap with Foreign Investors in Indian Markets

Domestic mutual funds (MFs) are rapidly narrowing the shareholding gap with foreign institutional investors (FIIs) in Indian capital markets. As of September 30, 2025, the difference stood at just 5.78%, a substantial reduction from 10.32% in June 2023 and significantly lower than the peak gap of 17.15% in March 2015. FII holdings have declined to a 13-year low of 16.71%, while MF holdings have climbed to an all-time high of 10.93%, marking nine consecutive quarters of growth. This trend is largely driven by consistent inflows from retail investors through Systematic Investment Plans (SIPs), with MFs investing a net ₹1.64 lakh crore in the quarter. In contrast, FIIs saw net outflows of ₹76,619 crore. This growing participation of domestic investors signifies a move towards greater market self-reliance, often termed 'atmanirbharta'. Domestic institutional investors (DIIs), including MFs, insurance companies, Alternative Investment Funds (AIFs), and Portfolio Management Services (PMS), collectively reached an all-time high shareholding of 18.26% by September 30, 2025, with net investments of ₹2.21 lakh crore in the quarter. The combined share of DIIs and retail/high-net-worth individuals (HNIs) has reached 27.78%, providing a strong counterbalance to FIIs' influence, which has diminished despite them historically being the largest non-promoter shareholder category. Sector-wise, DIIs increased their exposure in Consumer Discretionary, while FIIs trimmed their holdings in Financial Services but increased them in Consumer Discretionary. Promoter holdings also saw a slight uptick to 40.70%, although they have declined over the past four years. Impact This trend indicates increasing domestic investor confidence and maturity in the Indian market, potentially leading to more stable market movements less susceptible to foreign capital flows. The rising share of domestic funds suggests sustained investment and potentially higher valuations for Indian companies. Impact Rating: 8/10 Difficult Terms: * Mutual Funds (MFs): A collective investment scheme where money from many investors is pooled together to invest in a diversified portfolio of stocks, bonds, or other securities. * Foreign Institutional Investors (FIIs): Overseas entities that invest in the financial markets of a host country. * Basis Points: A unit of measure equal to one-hundredth of one percent (0.01%). Used for small changes in percentages. * Shareholding: The proportion of a company's shares that are owned by a particular shareholder or group. * Atmanirbharta: A Hindi term meaning self-reliance or self-sufficiency. * Systematic Investment Plan (SIPs): A disciplined way of investing a fixed amount of money into mutual funds at regular intervals, typically monthly. * Domestic Institutional Investors (DIIs): Indian entities like mutual funds, insurance companies, pension funds, etc., that invest in the Indian stock market. * Alternative Investment Funds (AIFs): Pooled investment vehicles that accept money from accredited investors or institutional investors and invest in a variety of assets, often outside traditional stock and bond markets. * Portfolio Management Services (PMS): A professional service that manages a client's investment portfolio according to their financial goals and risk tolerance. * Retail investors: Individual investors who trade securities for their own personal accounts. * High-Net-Worth Individuals (HNIs): Individuals who possess substantial liquid assets or investable wealth, often exceeding a specific threshold (e.g., ₹2 lakh in this context). * Promoter: The founder or group of founders who initiate a company and typically hold a significant stake in it. * Market Capitalisation: The total market value of a company's outstanding shares, calculated by multiplying the current share price by the total number of shares outstanding.