Mutual Funds Are Deploying Cash, FPIs Are Making A Comeback – Is This A Positive Sign For Indian Equities?

After months of relying largely on domestic investors, Indian equities are once again attracting support from foreign funds. Mutual funds are deploying more cash, taking their cash holdings to the lowest level of the year, while foreign portfolio investors (FPIs) have returned as buyers after four months of heavy selling. The twin developments suggest that confidence in the market is gradually improving, even as uncertainty around the geopolitical landscape and the impact of the recent US-Iran conflict on Q1 FY27 earnings leave investors questioning whether the recent rebound in valuations is justified.

For much of this year, mutual funds were sitting on big cash piles, even as they absorbed a large part of the relentless selling by FPIs. Now, as both domestic institutions and overseas investors increase their equity allocations, liquidity conditions could improve and demand for equities could strengthen.

Mutual Funds Dip Into Cash Reserves

Cash holdings by equity-oriented mutual funds declined to about Rs 1.84 lakh crore in June from Rs 1.89 lakh crore in May, the lowest level of calendar year 2026, according to data from ACE MF, as cited in a report by the Securities and Exchange Board of India (Sebi)-registered stock broker Mata Securities.

The decline suggests fresh inflows were not the only source of equity buying during the month. Fund managers also deployed part of their existing cash reserves to increase investments in stocks. The report showed equity mutual funds bought stocks worth Rs 50,643 crore during the month. While that was lower than the Rs 60,597 crore figure of May, it comfortably exceeded the month’s net inflows into equity schemes.

According to the Association of Mutual Funds in India (Amfi), equity-oriented mutual funds saw net inflows of Rs 28,973 crore in June, up 26.50 per cent from Rs 22,908 crore in May. Systematic investment plan (SIP) contributions also climbed 2.70 per cent to Rs 31,781 crore, their highest level in three months and close to March’s record Rs 32,087 crore.

The difference between equity purchases and net inflows indicates fund managers were deploying cash already available with them in addition to investing new inflows.

The average cash holding ratio across the country’s 20 largest asset management companies (AMCs) also declined to 4.53 per cent in June from 4.79 per cent in May, another calendar-year low.

“The continued reduction indicates greater cash deployment and a stronger preference to remain invested, reflecting improving market confidence while maintaining adequate liquidity to manage volatility and capture emerging opportunities,” the report said.

Lower cash balances generally signal stronger conviction among fund managers, although they also leave less room to deploy capital if markets witness a sharp correction.

FPIs Return As Buyers

FPIs, meanwhile, also seem to have returned to Indian equities. According to data from the National Securities Depository (NSDL), FPIs have invested Rs 15,077 crore in Indian equities so far in July after offloading more than Rs 2.61 lakh crore during the previous four months.

According to Goldman Sachs, foreign investors are still lightly invested in Indian equities, creating scope for further inflows as economic conditions improve. In its India Strategy: Room To Rebound report dated July 11, the brokerage said India’s “outlook has improved in recent weeks” amid lower commodity prices, a stabilised currency, resilient domestic growth, healthy second-quarter earnings expectations, and a potential recovery across several domestic sectors. The report said that “with ultra-light foreign positioning, we see ample room for flows to return”.

The brokerage expects the Nifty 50 to recover towards its June 2027 target of 26,500, implying roughly 10 per cent upside from prevailing levels after the market’s first-half correction. It also expects investors to rotate from growth stocks towards reasonably valued segments, as confidence in the economic recovery improves. Goldman Sachs said that large-cap companies and banking stocks, which saw significant foreign selling earlier this year, could be among the biggest beneficiaries as overseas investors gradually rebuild allocations.

“India’s long-term growth trajectory and improving corporate fundamentals remain intact. While foreign institutional flows have been muted in the past year primarily due to stretched relative valuations and more attractive alternatives globally, valuation dynamics are now shifting in India’s favour. Nifty50 now trades at a 1-year forward multiple of 20.0x, below its five-year average of 21.5x, and MSCI India sits at 21.6x versus a five-year mean of 23.7x. Coupled with resilient macro management, eased geopolitical tensions, and deepening trade ties with key partners, these factors have reinforced the Indian equity market’s standing. In short, with solid fundamentals and more attractive forward earnings valuations, India presents a compelling strategic opportunity for global investors,” Payal Pandya, vice president, Bajaj Broking Privé Research told Outlook Money.

Since May-end, equity benchmark Nifty 50 has gained over 2.20 per cent and the Sensex over 3.20 per cent. On a year-to-date (YTD) basis, both the benchmarks are still 8-10 per cent down. Whether the market can build on the recent gains will depend on earnings and the durability of institutional flows, but the data suggests that institutional confidence in Indian equities is strengthening.