Playing long on India: Should retail investors bail FIIs out?

A typical theme that has dominated equity market conversations over the last six months is whether domestic institutional investors (DIIs) should keep funding the relentless exodus of foreign institutional investors (FIIs) from Indian markets.

Experts, speaking at the Mint India Investment Summit and Awards 2025 in Mumbai on Saturday, however, said investors should look beyond the “us vs. them” mindset, as falling markets usually have barely any correlation with FII selling.

“It is a fool’s errand to second guess what FIIs are going to do as there is no correlation between FII selling and markets falling, except the latest one,” said Devina Mehra, founder, chairperson and managing director of First Global.

Mehra said that between 1994 and 2003, FIIs were invested in India even when the net return on the broader index was 0%.

Market participants should not attach any sort of morality to the FIIs’ current rush for the exit and not see them as fleeing the domestic market, said Sanjoy Bhattacharyya, managing partner at Fortuna Capital.

Since September 2024, FIIs have been net sellers of Indian stocks, pulling out over ₹1 trillion between October 2024 and February 2025. At a yearly level, FIIs pulled out over $15.46 billion in 2025 so far, compared to an inflow of $21.43 billion in 2023 and an outflow of $17.02 billion in 2022.

Indian equities’ overvaluation relative to its peers and a tepid corporate earnings growth trajectory led to the latest exit of FIIs. Right now, market participants are sitting tight in the face of looming global trade wars and a recession in the US.

Experts, however, said the possibility of a US recession remains less of a concern as of now. Rather, they are more concerned about India’s credit growth issues and the country not being able to fully utilize its demographic dividend.

Despite these challenges, Bhattacharyya said, the country’s economic fundamentals are sound enough to comfort investors for now and domestic equities have turned reasonably valued following the latest bouts of correction. “So, if prices fall meaningfully further, it would be a good time to invest,” he added.

Echoing a similar view, Mehra said investors should not sit out of the market in the face of current market volatility and keep in mind that the heroes of the last bull run will not lead the next upcycle. “There is money to be made in the market, not just from the same set of stocks you have lost your money in,” she said.

While encouraging increased bets on domestic equities, experts said portfolio diversification is more essential now than ever. “Diversification is the only free lunch in the industry, which gives you that extra protective cover against market volatility,” said Bhattacharyya.

Portfolios should be diversified across geographies and not just asset classes or sectors. The higher the level of diversification, the more predictable are the final returns, said Mehra.

However, Bhattacharyya cautioned against over-diversification as well. “The average mutual fund has 75-80 stocks. The one thing about diversification is that anything good in life can be taken to excess. And when you own such a large number of stocks, you lose some of the benefits of diversification because there are what are called cancelling-out effects (in portfolios),” he said.