Indian retail investors are now buying almost every market correction aggressively enough to prevent deep selloffs — fundamentally changing how the India’s equity markets behave. But a new report by Elara Capital warned that despite the relentless liquidity, actual returns across most mutual fund categories are increasingly looking mediocre.
According to a new liquidity tracker by Elara Securities, domestic investors accelerated equity mutual fund inflows by nearly 40% during March-April 2026 compared to the average monthly run-rate of the previous six months.
The surge followed the sharp market correction triggered by the Iran conflict and marks the third major “buy-the-dip” cycle seen in Indian markets over the last two years.
Previous buying waves emerged:
after Donald Trump’s election-triggered volatility in late 2024,
and again in July 2025 when markets corrected toward their 200-day moving averages.
Elara said a clear pattern has emerged: every meaningful correction is now being met with rapid domestic buying, helping markets rebound sharply and shortening the duration of declines.
“Importantly, this incremental liquidity is increasingly concentrated in the broader market. The acceleration in flows during corrections has been most pronounced in mid- and small-cap funds, both of which recorded fresh record-high inflows during Mar–Apr. This continued domestic participation remains a key reason why market breadth and recovery momentum have remained resilient despite global risk-off phases,” said the report.
Midcaps and smallcaps are seeing the biggest liquidity rush
The strongest inflows are increasingly moving toward broader market segments rather than traditional large-cap safety.
During March-April 2026:
mid-cap funds attracted:
₹6,551 crore,
while small-cap funds saw:
₹6,886 crore in inflows.
Both categories recorded fresh record-high inflows during the latest correction cycle.
Flexi-cap funds received:
₹10,148 crore,
while total pure equity fund inflows stood at:
₹38,733 crore.
SIP inflows also remained resilient at:
₹31,115 crore for the month,
highlighting continued retail participation despite global uncertainty.
Overall equity-related inflows, including ETFs and balanced funds, reached:
₹58,207 crore,
while total equity assets under management climbed to:
₹53.5 lakh crore.
Retail money is concentrating into a handful of schemes
The report found that retail dip-buying is becoming increasingly concentrated among a select group of mutual funds.
According to Elara: nearly 77% of buy-on-dip flows during the March-April 2026 correction cycle were concentrated within the top 35 schemes.
Among the biggest beneficiaries:
Parag Parikh Flexi Cap Fund received:
₹7,549 crore,
HDFC Flexi Cap:
₹5,473 crore,
Bandhan Small Cap:
₹3,416 crore,
and HDFC Mid Cap:
The table highlights funds that witnessed strongest inflows during recent market corrections.
Elara noted that the same funds repeatedly attract disproportionate inflows during every correction phase, suggesting domestic investors are increasingly following a predictable playbook.
Markets are bouncing back faster — but returns are disappointing
Is the buy-on-dip strategy truly delivering superior outcomes?- Returns below debt for most categories
Over the past two years, markets have witnessed three correction phases where flows accelerated to “buy the dip.” While this behaviour has helped markets rebound sharply from lows, the actual return profile across categories remain modest.
For example:
large-cap funds delivered median two-year CAGR returns of:
just 2.9%,
flexi-cap funds:
4.8%,
focused funds:
4.4%,
and value funds:
3.6%.
Mid-cap funds performed better with:
8.7% median two-year CAGR returns,
while small-cap funds delivered:
6.1%.
The report estimates debt investments generated roughly:
7–8% pre-tax returns,
or:
5–5.5% post-tax,
during the same period.
median two-year CAGR returns for most equity fund categories remain below debt returns,
he data suggests that flows have become a key driver of returns, with categories attracting stronger incremental liquidity delivering relatively better performance.
For now, India’s domestic investors remain firmly committed to the “buy the dip” strategy.
Another major finding is that persistent domestic liquidity may be fundamentally altering India’s market cycles.
Historically, Indian bull markets were usually preceded by:
sharp drawdowns,
prolonged weak phases,
and valuation resets.
But since 2020, despite multiple corrections, Indian markets have avoided any deep or sustained drawdown.
The report says aggressive domestic inflows during every selloff have repeatedly cushioned declines and shortened weak phases.
Even during the softer 2022–23 period, markets avoided a major reset before transitioning into another bull phase.
Elara described this as a structural change driven by persistent domestic liquidity.
Mutual funds are deploying cash aggressively
The report also found that fund houses are rapidly deploying cash back into equities.
Overall mutual fund cash holdings have fallen from:
6.8% in April 2025,
to:
5% in April 2026,
the lowest level since June 2024.
Mid-cap schemes saw the sharpest cash deployment:
cash levels dropped to:
3.7%,
from:
5.2% in December 2025.
Absolute mid-cap cash holdings declined by nearly:
₹6,600 crore in four months,
indicating aggressive buying activity.
Among AMCs, the largest cash deployment was seen in:
HDFC Mutual Fund,
Parag Parikh,
ICICI,
Kotak,
and Motilal Oswal.
Banks and IT stocks are seeing the biggest buying
Mutual funds sharply increased exposure to banking and technology stocks during CY26.
The biggest purchases included:
ICICI Bank:
₹19,253 crore,
HDFC Bank:
₹15,038 crore,
Bharti Airtel:
₹8,890 crore,
Infosys:
₹6,397 crore,
and Kotak Mahindra Bank:
₹6,808 crore.
Meanwhile, the biggest selling was seen in:
Jio Financial,
Wipro,
GE Vernova,
Hindalco,
and Cummins India.
Sectorally:
private banks emerged as the most over-owned sector,
while:
NBFCs became the most under-owned.
What this means for investors
The report highlights a major shift underway in India’s markets:
retail liquidity is no longer just supporting rallies — it is increasingly preventing deep corrections altogether.
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