India equity funds cut cash to 4% as foreign buyers return
Indian equity mutual funds have slashed cash reserves to a 19-month low while foreign investors resume buying, creating a dual-engine boost for a market rally that remains contingent on corporate earnings catching up.
Equity mutual funds in India reduced their cash holdings to 4% of assets in June, the lowest ratio in 19 months, while foreign institutional investors turned net buyers for the first time in four months. The simultaneous shift signals a broad improvement in institutional risk appetite after a 9% first-half drawdown in the Nifty 50 index.
Fund managers deployed Rs 4,564 crore in June, bringing total industry cash down to Rs 1.83 lakh crore as equity assets under management rose to Rs 45.78 lakh crore. The deployment marks a sharp reversal from April, when cash piles peaked at Rs 2.23 lakh crore, or 6.12% of AUM. Since that peak, managers have injected roughly Rs 40,238 crore back into equities.
The return of foreign capital is a critical catalyst for sustained upside. “With ultra-light foreign positioning, we see ample room for flows to return,” said Goldman Sachs analyst Amorita Goel. Her firm cites lower commodity prices, a stabilised rupee and resilient domestic growth as factors improving India's outlook, reiterating a June 2027 Nifty target of 26,500.
This capital reallocation is driving a noticeable rotation from growth to value. Goldman expects heavily sold large-cap stocks and banks to be the primary beneficiaries as foreign outflows reverse. Domestic fund managers are largely reaching the same conclusion, finding better risk-reward profiles in large caps compared to mid- and small-cap segments where valuations have outpaced near-term fundamentals.
However, the deployment is not unanimous. Of the 50 fund houses tracked, 29 cut cash in June while 21 increased their buffers. SBI Mutual Fund led the reduction by deploying Rs 3,830 crore, followed by PPFAS and Motilal Oswal. Conversely, Quant Mutual Fund, Nippon India and ICICI Prudential all raised cash, highlighting lingering divisions over near-term valuations and risks.
Capital is concentrating in specific domestically oriented sectors. Axis Mutual Fund and Canara Robeco Asset Management both pointed to banking, consumer discretionary, capital goods and manufacturing. “From a portfolio positioning perspective, we remain overweight on sectors such as financials, consumer discretionary, select auto, pharma, hotels, and telecom,” said Shridatta Bhandwadar, chief investment officer for equities at Canara Robeco. He noted that large-cap valuations of 17 to 17.5 times FY28 earnings remain historically reasonable.
Whether these flows can sustain a fresh bull run ultimately depends on corporate earnings. While institutional cash deployment and foreign buying provide a strong foundation, market participants remain wary that geopolitical developments and monsoon uncertainties could still trigger near-term volatility.
