When homegrown capital outgrows foreign funds: Can India fund its own growth?

According to Prime Database, as of the March 2025 quarter, DIIs held a 17.62% stake in NSE-listed companies, against FPI ownership of 17.22%. This 40 basis point shift reflects a profound structural transformation. 

After decades of dominance by foreign investors, Indian capital is now taking centre stage in its own market. The question is no longer just about ownership; it’s about control, influence, and long-term financial self-reliance. Is India now in a position to fund its own growth story?

To appreciate the scale of this change, consider that FPIs held over 21% of NSE market capitalization in 2020. Their stake has steadily declined due to outflows driven by global monetary tightening, rising interest rates in the West, and geopolitical volatility. 

In contrast, DIIs, including mutual funds, insurance companies, pension funds, and banks, have more than doubled their share since 2020, when they owned just 13.58 % of listed companies.

A significant catalyst behind this rise has been the surge in mutual fund investments. Assets under management (AUM) of Indian mutual funds crossed ₹60 lakh crore in December 2025, up from ₹22 lakh crore in 2020, according to AMFI (Association of Mutual Funds in India). 

In fact, total amount collected through SIP during March 2025 was ₹ 25,926 crore, highlighting a broad-based retail revolution fuelling DII inflows. Add to this the increasing equity allocation by long-term institutions like the Employees’ Provident Fund Organisation (EPFO) and the Life Insurance Corporation (LIC), and the result is a deepening pool of domestic capital with a long-term orientation.

This transition couldn’t come at a better time. In 2022, FPIs pulled out nearly ₹1.21 trillion from Indian equities due to aggressive rate hikes by global central banks. Despite this, Indian markets remained remarkably resilient — the benchmark Nifty 50 delivered a 20% return in 2023 alone. The reason? DIIs and retail investors stepped up and bought the dips, cushioning the market from global shocks. 

For the last 100 months (ending April 2025), the traded volume of FPIs and DIIs in Indian equities bear a high negative correlation of -0.85, which is stronger at -0.96 during the last 12 months.

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India turns inward

This behavioral shift is a sign of market maturity challenging the long-standing narrative that Indian equities depend on foreign flows to sustain momentum. The new reality is that Indian markets now have a large, committed domestic base that believes in India’s long-term fundamentals. 

This growing domestic ownership has consequences beyond market stability. DIIs now have a stronger say in corporate governance. They are increasingly pushing for transparency, ESG adoption, better board practices, and responsible capital allocation.

 Institutional activism—once seen only among global investors —is slowly but surely taking root among Indian institutions as well. But influence must be wielded responsibly. They must vote thoughtfully on key resolutions, prevent value destruction, and ensure companies stay aligned with broader shareholder interests. 

Securities and Exchange Board of India (Sebi) has been instrumental in pushing for greater disclosure and stewardship codes — but enforcement and consistency remain crucial.

DIIs have benefited from a long bull run and growing investor confidence. But what happens when markets face prolonged correction or macro headwinds? Will retail flows into mutual funds sustain, or reverse? Also, FPIs are known to return quickly when global conditions turn favorable. 

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Nonetheless, this episode has demonstrated a fundamental truth: India can be robust to global shocks and volatility led by foreign capital, if DIIs remain committed. Much of this progress can be credited to policy shifts over the last decade — allowing EPFO to invest in equities, digitizing KYC, launching Bharat Bond ETFs, increasing SIP awareness, and deepening market access through platforms like UPI and mobile trading. Financial inclusion is no longer just a banking metric — it’s now visible in equity ownership.

Going forward, further reforms to encourage retirement fund participation in markets, incentivise long-term investing, and protect retail investors will be key. Equally important is fostering trust through consistent regulation, reduced mis-selling, and robust investor education. 

For a long time, India chased foreign capital as a validation of its growth story. But this shift in ownership suggests something deeper: that confidence in India’s future now comes from within. That perhaps, for the first time, Indian savings are aligning with Indian aspirations.

And in a world riddled with uncertainty, that kind of homegrown conviction might just be the most valuable capital of all.

Pratibha Kumari is an assistant professor at TAPMI Bengaluru and Nishat Alam Choudhury is a postdoctoral researcher at Aalto University, Finland.