Foreign Investors Adjust Indian Equity Holdings, But Long-Term Outlook Remains Strong

Despite Recent Sell-Off, Foreign Institutional Investors Remain Committed to India

While recent market corrections and foreign outflows have raised concerns, Arvind Chari, Chief Investment Officer (CIO) of Q India (UK), reassured investors that foreign institutional investors (FIIs) remain deeply invested in Indian equities.

Speaking at a Quantum Mutual Fund event in Mumbai, Chari emphasized that while FIIs have sold approximately $25 billion worth of Indian equities since October, this represents less than 5% of their total holdings in India. The bigger picture, he explained, suggests that foreign investors are adjusting portfolios rather than making an exit.

“Foreign investors still hold $800 billion worth of Indian equities. I believe that number will not only remain stable but will increase over time,” he noted.

Understanding Foreign Investment in Indian Markets

Foreign investors have played a crucial role in India’s market growth over the last two decades. Since 2004, FIIs have invested around $200 billion in Indian equities at cost, which grew to a peak of $950 billion in market value. The recent market correction and outflows have reduced this figure to approximately $800 billion, but the underlying trend remains positive.

“The $25 billion outflow might look large in absolute terms, but relative to the total foreign holdings, it’s just a small adjustment,” Chari said.

India’s Undervalued Position in Global Portfolios

A key takeaway from Chari’s remarks was that India remains underrepresented in global investment portfolios.

• Global assets under management (AUM) total around $300 trillion, yet at its peak, Indian equities accounted for only $1 trillion—or just 0.3% of the global investment pie.
• Meanwhile, India’s weight in global GDP is about 4%, and in the global stock market, it stands at 4.5%.
• This means that foreign investors are significantly under-allocated to India, given the country’s economic potential.

“As awareness grows, and as part of my role, I am working on spreading this message, we will see more capital flowing into India over the next 5, 10, and 20 years,” Chari said.

He encouraged both foreign and domestic investors to seize the opportunity.

“If you haven’t started investing in India yet, now is the time to allocate capital and build a long-term portfolio.”

Indian Mutual Funds vs. Foreign Investors: A Growing Domestic Market

While foreign investors have historically played a key role in India’s market expansion, domestic mutual funds have emerged as a strong force, backed by retail and institutional Indian investors.

“In just the last 10 years, Indian mutual funds have invested $160 billion in the stock market, whereas FIIs invested $200 billion over two decades,” Chari noted.

This highlights the growing self-reliance of Indian markets, reducing overdependence on foreign flows. The steady rise of systematic investment plans (SIPs) and domestic participation has provided resilience to Indian equities, even during global financial turbulence.

Investment Strategy: The “12-20-80” Portfolio Approach

Chirag Mehta, CIO of Quantum AMC, also spoke at the event, introducing a tried-and-tested investment strategy to help investors navigate volatile markets.

The “12-20-80” Asset Allocation Strategy:

1. 12 Months of Expenses in Safe Assets
   • Ensure you have enough liquidity for emergencies by keeping one year’s worth of living expenses in fixed deposits or debt funds.
2. 20% Allocation to Gold
   • Gold serves as a hedge against inflation and economic downturns.
3. 80% in Equities (Diversified Across Market Caps)
   • Long-term growth is driven by equity investments, spread across large-cap, mid-cap, and small-cap stocks.

Mehta explained that this strategy balances risk and return, making it one of the most resilient investment approaches.

“Following this method ensures that you can sail through any market condition while minimizing risks and maximizing returns,” he said.

Long-Term Investment in India Remains Promising

Despite temporary market corrections and FII outflows, the long-term trajectory of Indian equities remains bullish.

Highlights for Investors:

1. Foreign investors remain heavily invested in India, with $800 billion in equity holdings, despite recent outflows.
2. India is underrepresented in global portfolios, meaning that more foreign investment is likely to flow into the country in the coming years.
3. Domestic investment is becoming a dominant force, with mutual funds investing $160 billion in just the last decade.
4. The “12-20-80” strategy offers a robust approach to asset allocation, ensuring both stability and growth in turbulent markets.

As India’s economy continues to expand and integrate into global financial markets, both foreign and domestic investors should recognize the immense potential for long-term wealth creation.