Dhiraj Agarwal says domestic fund flows could slow as market returns decline

Inflows from retail and domestic institutional investors (DIIs) have played a key role in supporting the Indian stock market in recent months, even as foreign investors pulled out. However, Dhiraj Agarwal, Managing Director at Ambit Investment Managers, warns that this trend may not hold if market returns continue to weaken.Citing historical data, he noted that whenever 12-month market returns turn negative, domestic flows tend to weaken. “We are almost there. I think 12-month return is just 1% or 2%. In another month or two, the 12-month return will start looking like a decline or a cut, and that usually impacts the DI flows,” he said.

Foreign institutional investors (FIIs) have sold equities worth nearly $15 billion so far this year, while monthly domestic inflows have continued to average ₹50,000 crore.

“I am not a bear on DII flows. Structurally, Indian households are still under-invested in equities, and it’s a structural, multi-year, multi-decade move. But can the roughly ₹50,000 crore a month kind of a run rate that we are seeing at this point of time drop down by 25-30% for a few months? You can’t rule that out. That risk is always there,” he said.He remains cautious about market conditions in 2025 and possibly 2026, highlighting sluggish earnings growth and the challenge of stock picking in a more polarised market.

While fluctuations in the US market may not significantly affect India’s long-term growth, a recession in the US would be negative for Indian equities. Agarwal believes the US is more likely to experience a slowdown rather than a deep recession, which India can navigate without severe consequences.

Also Read | Raamdeo Agrawal’s advice: ‘Don’t hesitate to start buying if…’

India’s earnings growth has slowed, and expectations for 2025-26 (FY26), currently at 12-13%, may fall below 10%.

India is no longer the only attractive investment destination. Europe’s economy is stabilising, and China’s property market is showing signs of recovery. Global investors now have more choices, which reduces India’s relative attractiveness compared to previous years.

Instead of a broad sector-based rally, the market is likely to see selective stocks performing well while others struggle, he said.

This mirrors the 2011-13 period when only a few stocks delivered strong returns while most underperformed. Investors will need to focus on earnings predictability and valuations rather than betting on broad sectoral trends.

For more details, watch the accompanying video

Catch the latest stock market updates here