Synopsis
Domestic mutual funds reduced cash holdings to a multi-year low of four percent. Foreign institutional investors have returned as buyers after a significant selling period. This dual liquidity boost signals increased institutional risk appetite in Indian equities. Fund managers are selectively deploying capital into reasonably valued segments. Large-cap stocks and banks are expected to benefit from these renewed flows.
Domestic mutual funds are running down cash just as foreign investors return to Indian equities, creating a potential two-engine liquidity boost for a market seeking its next leg higher. The mutual fund industry’s cash ratio dropped to a multi-year low of 4% in June, while foreign institutional investors (FIIs) have pumped Rs 15,559 crore into Indian stocks so far in July. The FII reversal follows four consecutive months of selling in which they pulled out a staggering Rs 2,60,925 crore.
The simultaneous shift is significant because domestic funds appear increasingly willing to deploy capital after the recent market rally, while foreign investors are returning from extremely light positioning. Whether those flows can sustain a fresh bull run will depend on their durability and whether corporate earnings catch up with the recovery in stock prices.
“With ultra-light foreign positioning, we see ample room for flows to return,” Goldman Sachs analyst Amorita Goel said in a recent note.
Goldman said India’s outlook has improved in recent weeks amid lower commodity prices, a stabilised currency, resilient domestic growth and healthy expectations for second-quarter earnings. It sees room for the Nifty to recover towards its June 2027 target of 26,500, implying about 10% upside from current levels after a 9% drawdown in the first half.
The brokerage expects a rotation from growth to value as investors search for reasonably priced segments in anticipation of an economic recovery. As foreign outflows reverse during the second half, Goldman expects heavily sold and reasonably valued pockets such as large cap stocks and banks to benefit the most.
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Mutual funds reduce cash buffer
Equity mutual funds reduced cash holdings by Rs 4,564 crore in June to Rs 1,83,094 crore from Rs 1,87,658 crore in May, shows data from ACE MF. The industry’s equity assets under management increased to Rs 45.78 lakh crore from Rs 44.26 lakh crore during the period.
The cash ratio consequently declined to multi-year low of 4% from 4.24% in May, a drop of about 24 basis points.
The absolute cash balance fell to a 19-month low. The last time mutual funds held less cash was November 2024, when the balance stood at about Rs 1.80 lakh crore and represented 4.98% of equity AUM.
The longer-term trend shows a sharp change in fund-manager positioning. Industry cash had peaked at Rs 2.23 lakh crore, or 6.12% of equity AUM, in April 2025. Since then, the cash pile has declined by about Rs 40,238 crore, while the ratio has contracted by more than 210 basis points.
The June reduction was broad, although not uniform. Of the 50 fund houses covered by the data, 29 reduced cash and 21 increased it.
SBI Mutual Fund recorded the biggest decline, cutting its cash balance by Rs 3,830 crore to Rs 22,084 crore. PPFAS Mutual Fund reduced cash by Rs 1,997 crore to Rs 24,107 crore, while Motilal Oswal Mutual Fund deployed about Rs 1,903 crore, bringing its cash balance down to Rs 2,531 crore.
Bandhan Mutual Fund, HDFC Mutual Fund, Axis Mutual Fund and Kotak Mutual Fund also reduced their cash holdings during June.
The trend was particularly visible at Parag Parikh Flexi Cap Fund, the country’s largest mutual fund scheme with assets of about Rs 1.4 lakh crore. Its cash balance declined from Rs 27,034 crore in April to Rs 25,652 crore in May and Rs 23,629 crore in June—a cumulative reduction of Rs 3,405 crore in two months.
Not every fund manager participated in the deployment. Quant Mutual Fund increased cash by Rs 1,825 crore during June, Nippon India Mutual Fund added Rs 1,809 crore and ICICI Prudential Mutual Fund raised its cash balance by Rs 1,501 crore. The divergence indicates that while the industry-level stance has turned more constructive, views on valuations and near-term risks remain divided.
Where mutual funds are finding value
Axis Mutual Fund said valuations became more balanced after moderating during the first three months of 2026, although opportunities remain selective.
“In the last few months, we have been selective and used the decline in markets to add to segments where valuations became more reasonable and earnings visibility remained intact,” the fund house said.
Axis said its incremental additions were concentrated in domestically oriented sectors, particularly banking, consumer discretionary, capital goods and manufacturing-linked businesses where balance sheets remain strong and medium-term growth drivers are supportive.
Largecap stocks and certain cyclical sectors now offer better entry points from a risk-reward perspective, according to Axis. By contrast, parts of the mid- and small-cap segments have rebounded more sharply, pushing valuations in some pockets ahead of near-term fundamentals.
The fund house remains cautious on consumer staples where margins are vulnerable to input-cost pressures or the earnings outlook remains unclear.
Shridatta Bhandwadar, chief investment officer for equities at Canara Robeco Asset Management, also sees value in large-cap stocks. Large-cap valuations of about 17-17.5 times FY28 earnings remain reasonable from a historical perspective, he said.
While geopolitical developments and monsoon-related uncertainties may keep markets volatile in the near term, such phases could offer attractive opportunities for investors with an 18-to-24-month horizon.
“From a portfolio positioning perspective, we remain overweight on sectors such as financials, consumer discretionary, select auto, pharma, hotels, and telecom,” Bhandwadar said.
The falling mutual fund cash ratio and the return of FIIs point to an improvement in institutional risk appetite. Yet neither signal amounts to an unconditional endorsement of the broader market: 21 fund houses raised cash, managers remain selective within mid- and small-caps, and geopolitical risks could still trigger volatility.
(Data: Surbhi Khanna)
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)
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