Whalesbook
Attractive Valuations Emerge
Shailesh Raj Bhan, President and CIO (equities) at Nippon India Mutual Fund, believes foreign investor selling has corrected Indian stock valuations, making them more attractive. He recommends this period as a good time to buy quality companies for long-term gains, suggesting investors even advance their Systematic Investment Plans (SIPs) for potentially better returns. Nippon India Mutual Fund itself focuses on buying world-class businesses at fair prices or solid companies that have seen sharp drops. The fund house generally avoids holding large cash reserves, preferring to focus on picking stocks based on their fundamentals to outperform benchmarks rather than trying to time the market.
Global Tensions, Oil Prices Drive Market Worries
While Bhan is optimistic about valuations, rising global tensions and their effect on commodity prices are a major concern. Crude oil, especially Brent crude, has climbed past $100 a barrel, trading around $104-$105 by May 11, 2026. This rise stems from ongoing conflicts and doubts over a US-Iran ceasefire, prolonging uncertainty over the Strait of Hormuz. Bhan warned that if oil prices reach $125 a barrel, it could trigger a significant market drop and lead investors to sell. This adds to global economic worries like inflation and interest rates, making investors hesitant about emerging markets. The Nifty 50 index fell 1.3% on May 11, 2026, largely due to oil price movements, contributing to a cautious market sentiment.
Nippon India's Investment Strategy
Nippon India Mutual Fund, managing between ₹7.09 lakh crore and ₹7.61 lakh crore in assets as of late 2025 and early 2026, has a clear investment philosophy. The fund house typically holds less than 5% cash in its schemes, seeing it as an unnecessary layer of decision-making. Its main focus is selecting stocks based on fundamentals to outperform benchmarks. This strategy prioritizes investing in sound businesses at attractive prices, simplifying the investment process and reducing reliance on market timing. Nippon India plans to consider the recent SEBI directive allowing higher allocation to commodities and Real Estate Investment Trusts (REITs) for only a small part of its portfolio, keeping its core equity schemes' allocation and risk profile consistent.
DIIs Gain Ground as FPIs Exit India
Foreign investor selling has been significant in 2026. FPIs have pulled over ₹2 lakh crore from Indian equities year-to-date as of May 10, 2026, far exceeding the ₹1.66 lakh crore withdrawn in all of 2025. This ongoing selling has pushed FPI ownership in Indian equities to a 14-year low of 14.7% by April 2026. Meanwhile, Domestic Institutional Investors (DIIs) have become the largest holders of Indian equities, surpassing FPIs in late 2024 and widening that lead. This shift indicates changing investor preferences, with India potentially losing its share of emerging market investments due to current global risk perceptions.
New SEBI Rules for Funds
Alongside market shifts, regulatory changes are also influencing fund managers. Starting January 1, 2026, SEBI has reclassified Real Estate Investment Trusts (REITs) as equity-related instruments. This aims to encourage more participation from mutual funds and specialized investment funds. While existing REIT investments in debt schemes as of December 31, 2025, are grandfathered, fund houses are encouraged to gradually sell them. REITs are expected to join equity indices after July 1, 2026, which could affect portfolio allocations for funds like Nippon India Mutual Fund. However, the fund house plans a cautious approach to adding them to core equity mandates.
Bear Case: High Oil Prices and FPI Outflows
Even with attractive valuations, the risks from geopolitical tensions and high crude oil prices present a strong case for caution. The Nifty 50's Price-to-Earnings (P/E) ratio is about 21.00. While this is below its 10-year average, there's little room for error if oil prices climb to $125 a barrel, which could cause panic selling. The ongoing conflict in West Asia and possible disruptions at the Strait of Hormuz pose significant risks that could hurt investor sentiment and increase FPI selling. Additionally, a weaker Indian Rupee raises concerns about imported inflation and makes Indian stocks less appealing for foreign investors. The growing dominance of DIIs over FPIs suggests the Indian market may increasingly move on domestic sentiment rather than foreign capital flows. India's economy is vulnerable to high oil prices, creating fiscal and balance-of-payments challenges.
Market Outlook Cautious Amid Uncertainty
Analysts expect continued volatility, with the market likely to trade within a range until the geopolitical situation and its impact on oil prices become clearer. While some see value in large-cap and mid-cap stocks, overall sentiment is cautious. The Indian market has recently underperformed some emerging market peers, like Korea, partly because it is less appealing to foreign capital. Earnings growth potential remains, but this depends on a stable economic environment and a resolution to global conflicts.