Foreign investors have pulled over $60 billion out of Indian equities since October 2024, making it tougher for domestic bulls to make money. Mutual funds, led by SIPs, have absorbed much of the shock, with monthly inflows holding firm close to ₹31,000 crore. Now a pointed debate has broken out: are India’s 6.3 crore retail SIP investors effectively bankrolling FII exits, handing foreign funds a clean escape hatch with domestic money?

When FIIs sell and domestic funds buy, the net effect is a transfer of equity ownership with domestic investors indirectly absorbing institutional exits. Some market participants have framed this as retail investors being left holding the bag while sophisticated foreign money rotates out to hunt for new winners in America, Taiwan and Korea.

In an exclusive interview with ET Markets, Venkat N. Chalasani, CEO of the Association of Mutual Funds in India (AMFI), says that framing gets it exactly backwards.

“Some people say we are providing an easy exit for FIIs but that’s not the case,” Chalasani said. “This proves the maturity of the market, and it will be one of the biggest positive factors attracting FIIs back in a big way. They will be comfortable entering because they know this is a robust market that will also give them the ability to exit when needed.”

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Chalasani, who spent years in SBI’s treasury, recalls that the Indian market was earlier hostage to FII sentiment precisely because it lacked domestic depth and liquidity. “If you go back 10–20 years, markets were extremely volatile because of external factors like geopolitical tensions, inflationary pressures and interest rate movements elsewhere. FIIs would come in and markets would appreciate; FIIs would exit and markets would collapse. I would check every day what FIIs were going to do — they were the big game changers, precisely because domestic liquidity was insufficient.”
That dynamic has now shifted. Domestic mutual funds, he argues, have replaced volatility with resilience and liquidity and that’s what will ultimately draw FIIs back, not drive them away.“A developed market is the one with liquidity and where large volumes can be handled without a big shake-up in the market. And that’s what domestic institutional investors are providing today, and we should appreciate that,” he explained.

Back in 2024, when the bull market was at its peak, the mutual fund industry was at the receiving end of another criticism that Indian households were shifting their savings away from low-cost bank deposits to higher-yielding mutual funds.

“At that time, we went on record to say that liquidity remains within the banking system regardless. When you and I invest in mutual funds, the money doesn’t leave the banking system — only the form changes. What was a savings bank deposit or fixed deposit now comes back to the bank as a current account balance or as a certificate of deposit. The liquidity always stays in the system,” the AMFI CEO said.

Also Read | Should you stop your SIP because the market is not doing well? History suggests otherwise

Mutual fund industry’s growth arithmetic
India’s mutual fund AUM-to-GDP ratio currently sits at 20–21%, against a global average of 65% and over 100% in some developed economies. AMFI’s targets reflect how much white space remains: 10 crore investors by 2030, up from 6.3 crore today, and AUM of ₹150 lakh crore — roughly 50% of projected GDP.

The growth is increasingly coming from beyond the country’s major urban centres. More than 55% of SIP accounts are now from B-30 cities — those outside India’s top 30 — and around 40% of monthly SIP contributions originate there. SEBI’s incentivisation scheme has played a role, offering distributors a 1% commission, capped at ₹2,000, for bringing in new investors from B-30 cities. AMCs have also lowered the floor, with some SIPs available for as little as ₹100 a month, and daily SIP options now available for India’s large base of daily-wage earners.

A SEBI survey recently found that 53% of Indian households are aware of mutual funds but only 6% have invested. That gap, more than any other number, captures both the industry’s challenge and its runway.

For the retail investor watching a negative portfolio balance for the first time, Chalasani’s message is to think of it as a small cost you are incurring for a long-term benefit you will accrue. “When you reframe a temporary fall as a cost rather than a loss, your attitude changes.”

“It is not the timing of the market that matters,” Chalasani said. “It is the time you spend staying in the market.”

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The number of Americans filing claims for unemployment benefits fell more than expected last week, consistent with labor market resilience. Initial claims for state unemployment benefits dropped 12,000 to a seasonally adjusted 215,000 for the week ended June 20, the Labor Department said on Thursday. Economists polled by Reuters had forecast 225,000 claims for the latest ‌week.

The data ⁠included last ⁠Friday’s Juneteenth public holiday, which could have contributed to part of the larger-than-expected decline. Claims are typically more complicated from the end of May through June when the school year ends, as some states allow non-teaching staff to file for unemployment benefits during the long school holidays. Seasonal factors, the model used by the government to strip out seasonal fluctuations from the data, do not ⁠always capture ‌these moves. Though claims have been hovering in the upper end of their 190,000-230,000 range for this year, there has been no ⁠material shift in the labor market, which has regained its footing after stumbling last year.

There have been no signs of employers resorting to widespread layoffs in response to surging costs stoked by the U.S.-led war with Iran. Companies, however, remain cautious about hiring. The number of people receiving unemployment benefits after an initial week of aid, a proxy for hiring, increased 21,000 to a seasonally adjusted 1.821 million during the ‌week ended June 13, the claims report showed. The so-called continuing claims data covered the period during which the government surveyed households for June’s unemployment rate.

The jobless rate ⁠has held at 4.3% for three straight months. Still, the lack of strong hiring has left many out-of-work people enduring long spells of unemployment. Recent college graduates are also having a hard time finding entry-level positions, a trend partly blamed on companies deploying artificial intelligence for some of these roles.

The median duration of unemployment jumped to 11.6 weeks in May, the longest stretch since November 2021, from 11.0 weeks in April, the government reported this month.

Mark Pownall is joined by Gary Adshead, Jack McGinn and Claire Tyrrell to talk WA business and politics, including the latest on the state Liberal party, bird flu impact, Water Corp’s Shenton Park plans, Rio Tinto’s CBD move, apartments at Hillarys, Satterley’s annual results and much more.