Mutual funds lead DIIs as June equity inflow stays strong in follow up to May

In contrast, foreign institutional investors (FIIs) have turned net sellers in Indian equities in June so far, after two consecutive months of net buying.

Sunny Agrawal of SBI Securities said the market has turned narrow, with investors increasingly adopting a bottom-up approach, preferring companies with strong earnings outlook and fair valuation. Riding on ample liquidity from SIP inflows, domestic mutual funds are selectively participating in the market and bulk/block deals.

Read More: Promoters rush for the exit as stocks soar but discounts raise alarm

June has already seen promoter and PE players exit shares totalling over Rs 42,000 crore through such deals, including Vishal Mega Mart (Rs 10,220 crore for a 19 percent stake), Bajaj Finserv (Rs 5,500 crore), Reliance’s stake sale in Asian Paints (Rs 9,600 crore), Suzlon Energy (Rs 970 crore), Alkem Labs (Rs 830 crore), and Aptus Value Housing (Rs 1,900 crore).

Analysts said foreign institutional investors (FIIs) too have stepped up participation in these block and bulk deals, with deal sizes doubling year-on-year.

However, concerns over stretched valuations persist in Indian markets. Sanjiv Prasad of Kotak Institutional Equities in its recent interview with Moneycontrol said while the Nifty 50 trades at around 22x one-year forward earnings - historically reasonable - it masks sectoral over-valuations, as low P/E sectors like banks, metals, and energy dilute the overall index multiple. Valuations across most sectors exceed pre-pandemic levels, even as earnings growth has stayed slow and competitive pressures have risen.

Read More: For the first time, DIIs hold larger share than FIIs in Indian markets

Meanwhile in the IPO space, mutual fund participation has been selective, favoring larger, quality businesses such as Schloss, Aegis Vopak, and Belrise, while avoiding smaller offerings like Scoda and Borana. In May, six IPOs raised Rs 8,983 crore, with mutual funds investing in only three. June has seen five IPOs worth Rs 4,448 crore so far, with major upcoming issues from HDB Financials (Rs 12,500 crore) and Sambhv Steel Tubes (Rs 540 crore).

In June so far, FIIs have turned net sellers, withdrawing Rs 630 crore after two consecutive months of net inflows - Rs 14,680 crore in May and Rs 10,733 crore in April. Prashant Tapse of Mehta Equities see the recent FII outflow due to profit booking and capital rotation toward markets like China, Southeast Asia, and the US.

According to Nirav Karkera of Fisdom, this reversal may not be alarming, reflects evolving global macro and geopolitical risks, profit booking, and portfolio rebalancing. Elevated Indian valuations relative to other emerging markets, subdued Q4FY25 earnings, and a stronger US dollar are also influencing the FII sentiment.

Indian markets witnessed considerable volatility in June so far, with both benchmark indices, the Sensex and Nifty, higher by 0.3 percent each, while the broader BSE Mid and Smallcap indices have gained 0.6 percent each.

Ajay Bagga of Independent Research said over the next five years, the global capital is expected to diversify beyond US markets toward Japan, Europe, and emerging markets, with India positioned to benefit, though high domestic valuations and promoter exits remain near-term headwinds.

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