Retail equity portfolios continue to trail benchmarks as weak returns test investor patience: Kotak’s Sanjeev Prasad

According to the report, retail investors earned only very modest returns from equity-oriented mutual funds between July 2024 and December 2025, even though this period accounted for 53 percent of all equity mutual fund flows mobilised between calendar years 2022 and 2025.

• Retail investors saw weak returns despite index gains over the past 18 months
• Mid-cap, small-cap, and thematic funds underperformed, eroding retail value
• Direct equity holdings and PMS also stagnated, testing investor patience

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Indian retail investors have seen their equity portfolios deliver weak or barely positive returns over the past 16–18 months even as benchmark indices posted modest gains. This divergence is in turn increasingly testing investor patience, according to Sanjeev Prasad of Kotak Institutional Equities in a latest note.

“Index returns have been so-so, portfolio returns not even so-so,” Prasad said in Kotak Institutional Equities’ latest report which analysed both direct equity holdings and investments through mutual funds and portfolio management schemes.

Investors patience being tested

The note said the weak trailing returns over the past 18 months may increasingly test retail investors’ patience, particularly because a large portion of retail money entered equities during this period of muted performance.

According to the report, retail investors earned only very modest returns from equity-oriented mutual funds between July 2024 and December 2025, even though this period accounted for 53 percent of all equity mutual fund flows mobilised between calendar years 2022 and 2025. The report noted that this underperformance came despite positive returns of the major market indices over the same period.

Based on Kotak’s analysis of weighted-average net asset values, retail investor would have needed to invest consistently since September 2022 to achieve more than 13 percent XIRR, excluding charges and taxes. The note added that investors who started systematic investment plans after calendar year 2023 would have generated mediocre returns.

Prasad said the underperformance was most pronounced in mid-cap, small-cap and thematic funds, which attracted the bulk of retail inflows over the past two years. These categories, performed similar or worse than overall equity MF over the past 18 months, with weighted-average NAVs of mid-cap funds down 3% from their September 2024 peak and those of small-cap and thematic funds down 13%.

Similar story for PMS

Portfolio management schemes offered little relief, the note said, noting that an analysis of the top 20 PMS strategies by assets under management showed that only a handful of schemes delivered decent returns over the past 12 months. While the PMS industry continued to receive strong inflows, he warned that continued underperformance may pose a risk to future inflows for this segment as well.

Prasad in the report also pointed to stagnation in direct retail equity holdings, saying retail investor AUM in NSE-listed stocks has been stable around Rs 43 trillion over the past 18 months. He attributed this to a prolonged time correction in broader equity markets and sharp price corrections in retail-dominated stocks, adding that direct retail flows into equities have tapered off in recent months.

The note highlighted significant value erosion across a large number of retail-dominated stocks since June 2024, after “astronomical returns over March 2023–June 2024”.  A portfolio of the top 20 retail-dominated stocks in the Nifty-500 Index has delivered negative returns since June 2024, with similar trends visible in several narrative-driven stocks with high retail ownership, the report added.

Kotak cautioned that valuations of many narrative stocks remain completely disconnected from the fundamentals of companies, despite the recent correction on failure of many of these narratives adding that these stocks will likely lose a significant portion of their market cap over time, a process that could prolong the pain for retail investors.

The brokerage expects Nifty earnings growth of 7.8 percent in 2026, rising to 17.5 percent in 2027 and 14.7 percent in 2028.