Over 2025, foreign investors have pulled out significant capital from the domestic markets. With U.S. President Trump’s tariff threats weighing on global sentiment, foreign investors have changed their stance on their allocations towards India.
According to domestic brokerage Elara Capital, capital has moved away from high-conviction, long-only active funds, which is often seen as "smart money", instead moving towards macro-driven, passive ETF allocations.
Foreign investors hold roughly $980 billion in Indian assets, of which, around $390 billion (or 40 percent) is held through funds. Out of these, ‘smart money’, the tag reserved for long-only, discretionary allocations targeted specifically at India, was invested in India from 2023 to October 2024.
However, following the U.S. election outcome and Trump’s victory altered sentiment. From then until March 2025, India witnessed a redemption cycle primarily in this smart-money bucket.
“Instead of recommitting to India via long-only, high-conviction vehicles, flows have increasingly been channelled into ETFs, a hallmark of top-down, macro-driven trades rather than bottom-up, India-specific confidence,” said Elara Capital.
Smart money has been retreating from Indian equities since the beginning of 2025. Unlike the earlier rally in 2023 and 2024, which was largely driven by these long-only active investors, now, the recent inflows are dominated by exchange-traded fund (ETF)-driven investments.
According to Elara Capital, the absence of active fund participation raises questions about the strength and sustainability of foreign investor conviction in India’s medium-term growth story. Redemptions from India-focused long-only strategies by foreign active funds, which is something Dalal Street has not witnessed since April 2018, have begun to reappear since January 2025.
This pattern echoes similar strategic shifts by foreign active investors during March 2007 and April 2011, both of which were followed by notable breadth deterioration in the market. Usually, the movement towards ETFs indicates that investors are taking a more risk-off approach, where investors reduce exposure to bottom-up conviction-driven ideas in favour of broader, liquid, and diversified vehicles.
"This change reflects reduced confidence in India's near-term economic fundamentals, policy direction, or earnings visibility. Unlike active flows that represent deeper, longer-term conviction, passive inflows often indicate top-down thematic plays, often driven by global asset allocation models rather than country-specific bottom-up optimism," noted Elara.
According to Elara Capital, emerging market funds are rotating their county-specific allocations, with India seeing profit-booking or rebalancing in favour of China. "The pickup in China allocation indicates renewed optimism or contrarian positioning by global investors - possibly driven by policy support, earnings recovery, or relative undervaluation vs India," the report added.
The brokerage suggested that this shift also reinforces the idea that active foreign funds are exiting or trimming India at a time when passive ETF inflows are dominating, which is often a sign of crowded positioning risk.
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