India’s Capital Markets Enter a New Phase: DIIs Overtake FPIs
After over 22 years, domestic institutional investors (DIIs) have overtaken foreign portfolio investors (FPIs) in Indian equities—driven by mutual fund growth, SIPs, and rising retail participation.
India’s capital markets are undergoing a quiet revolution. For the first time in decades, Domestic Institutional Investors (DIIs) — led by mutual funds, insurance firms, and pension funds — have overtaken Foreign Portfolio Investors (FPIs) in equity ownership. This shift is not merely symbolic; it reflects a deeper transformation in how Indian households save and invest, reshaping market behavior and resilience.
A Historic Reversal: Domestic Capital Takes the Lead
The year 2024 marked a turning point in Indian capital markets. According to data from NSE, DIIs’ ownership in NSE-listed companies has now surpassed that of FPIs, reversing a long-standing trend that began in the 1990s when foreign capital poured into liberalizing Indian markets.
While FPIs sold over ₹43,000 crore in Indian equities in Q4 FY24,
DIIs stepped up with ₹87,000 crore in net investments. This isn’t a one-off. It marks the culmination of a multi-year trend powered by consistent domestic inflows, even during periods of global uncertainty.
The Mutual Fund Engine: From Retail SIPs to Institutional Muscle
The mutual fund industry is at the heart of this domestic rise. Assets under management (AUM) have nearly doubled in just three years—from
₹31.4 lakh crore in FY21 to ₹54.5 lakh crore by March 2024. Notably, equity-oriented funds grew to ₹23.6 lakh crore, accounting for over 43% of total AUM.
This growth is not driven by hot money or speculative trading but by systematic investment plans (SIPs). In FY24 alone, SIP inflows reached a record ₹2.3 lakh crore, a 25% jump from the previous year.
This wave of SIP-driven investing has created a dependable domestic demand base for Indian equities, lending markets greater resilience during FPI sell-offs and global risk-off events.
Households Are Rewiring Their Portfolios
What’s powering this mutual fund boom? It begins at home. Indian households are changing how they save. Traditionally, the bulk of financial savings went into fixed deposits, gold, or life insurance. Today, equity and mutual fund allocations are rising steadily.
As per RBI data, household financial savings saw a strong uptick in FY24, with net inflows into mutual funds growing nearly 50% year-over-year. In FY23, 89% of individual investments in mutual funds were routed through SIPs, highlighting long-term retail commitment.
This shift toward market-based savings isn’t just good for mutual funds—it creates a virtuous cycle where rising equity ownership fuels wealth creation, financial literacy, and deeper capital markets.
Beyond Equities: The Rise of Domestic Flows in Debt and Alternatives
While equities have garnered most of the spotlight, domestic investors are also beginning to shape India’s debt markets and alternative investment space. Mutual funds have expanded their reach into fixed income, with debt-oriented AUM touching ₹15.3 lakh crore in FY24, up from ₹12.3 lakh crore in FY21.
Simultaneously, products like REITs, INVITs, and AIFs (alternative investment funds) are gaining traction among high-net-worth individuals (HNIs) and family offices. The National Pension System (NPS) has also witnessed robust growth, further deepening domestic capital pools across asset classes.
This diversification reflects a more mature investor base seeking long-term, risk-adjusted returns—not just market momentum.
The Tectonic Shift: DIIs vs FPIs Over the Years
To appreciate how far domestic investors have come, here’s a snapshot of the FPI-DII dynamic over the past five years:
DIIs have consistently absorbed FPI outflows, most notably during FY22 and FY23. This counterbalancing force has transformed India’s market behavior—no longer overly sensitive to foreign flows, India’s equities are beginning to chart a more domestically anchored course.
A Global Perspective: Following the U.S. Playbook?
India’s experience mirrors the evolution of mature markets. In the U.S., mutual funds and ETFs have long dominated public market flows. Retail investors—directly or via retirement accounts—now own a majority of U.S. equities, with passive funds reshaping investment behavior.
In other emerging markets like Brazil, domestic investors also lead, thanks to robust pension and mutual fund systems. However, in most of Asia and Africa, foreign capital still dominates.
India’s domestic-led boom signals a broader maturing of its financial ecosystem, driven by digitization, regulatory trust, fintech integration (e.g., UPI, account aggregators), and tax-efficient products like ELSS and NPS.
What It Means for Indian Markets
This surge in domestic equity participation has several far-reaching implications:
- Market Stability: DII flows are more stable and less sentiment-driven than FPI flows.
- Policy Leverage: Policymakers have greater room to maneuver without fearing sharp market reactions.
- Product Innovation: Rising retail interest could fuel growth in passive products, thematic funds, and robo-advisory services.
- Investor Protection & Literacy: As retail participation rises, there will be a growing demand for transparency, governance, and education.
A New Era of Market Sovereignty
India’s equity markets are no longer beholden to foreign capital. The rise of domestic investors—rooted in household behavioral change, mutual fund growth, and institutional evolution—is ushering in a new era. It’s an era where Indian savings increasingly drive Indian growth.
The implications go beyond market performance. This shift reflects deeper economic confidence, financial empowerment, and a maturing investment culture that will shape India’s capital markets for decades to come.
