FPI outflows: Rupee returns beat MFs despite $27bn exit

What changed for FPIs and mutual funds

Foreign portfolio investors (FPIs) beat Indian mutual fund managers on rupee returns last year even as they pulled money out of Indian equities. The article data shows a record outflow of $17 billion, equivalent to ₹240,000 crore, during the period being discussed. Despite that selling, FPIs delivered a 7.7% rupee return on assets versus 4.4% for mutual funds. The gap is largely tied to where FPIs were positioned, and how India’s benchmark indices performed. But the same period looked different when measured in dollars because the rupee weakened. That currency drag meant FPI returns in dollar terms lagged those of mutual funds.

Why rupee returns favoured FPIs last year

The key explanation offered is portfolio composition. FPIs were described as being concentrated in Nifty top 50 to 100 stocks, which outperformed the broader market last year. Mutual funds, in contrast, had greater exposure to mid- and small-cap segments, which did not keep pace in that phase. This difference matters because headline returns often track index leadership more than overall market breadth. When large caps lead, portfolios tilted to the Nifty tend to look better on a rupee-return basis. It also helps explain how strong rupee returns can coexist with large net outflows, since selling pressure does not necessarily imply losses on previously accumulated positions.

The tables turn in early 2026 as broader markets lead

The data notes that the pattern shifted in the first quarter of the current calendar year, with broader markets outperforming the Nifty. That is the opposite of what helped FPIs in the prior year. Still, the same text flags that it is “early days,” suggesting the leadership change may not be durable yet. For investors, this highlights a recurring cycle in Indian equities where performance rotates between large-cap benchmarks and the broader market. It also affects relative performance comparisons between foreign and domestic managers because their typical portfolio weights differ.

Dollar returns show the cost of a weaker rupee

In dollar terms, the story becomes less favourable for FPIs. Bloomberg data cited shows the Nifty 50 USD delivered a -13.41% return over the past year through 22 May, while the Nifty in rupee terms was down by barely 4% over the same period. This divergence illustrates how currency depreciation can overwhelm local-market performance for foreign investors. Even when local indices are relatively stable in rupee terms, the conversion back to dollars can turn returns sharply negative. The article also notes that in prior periods, dollar returns underperformed rupee returns even when both were positive.

Outflows accelerated again in April and May 2026

The selling trend continued into 2026. NSDL data cited in the article shows FPIs pulled ₹32,963 crore from Indian equities in May amid concerns over earnings growth, a weakening rupee, and better overseas opportunities. A separate data point in the same text reports outflows of ₹27,048 crore so far in May, reinforcing the direction even if the exact cut-off differs. In April, FPIs recorded net outflows of ₹60,847 crore. Cumulative 2026 outflows are cited at around ₹220,000 crore to ₹225,000 crore, already above the ₹166,000 crore withdrawn during all of 2025.

Two-year selling vs a rising market

The article frames the bigger picture as persistent foreign selling alongside a market that kept rising. It states Indian equities saw outflows of nearly $18 billion over the last two years, driven by foreign investors, foreign promoters, and private equity firms reducing exposure. Within that, FPIs alone sold around $14 billion since April 2024, and FY26 FPI equity outflows hit a record $11 billion. Yet the market’s resilience is attributed to a steady domestic bid, particularly from retail investors investing via systematic investment plans (SIPs) and mutual funds.

Domestic flows: SIPs and mutual funds absorbed supply

The article points to SIP inflows staying near record highs, crossing ₹38,000 crore per month, providing a consistent demand for equities. It also cites a specific early-2026 comparison: when FPIs pulled nearly $14 billion in the first three months of 2026, domestic mutual funds deployed close to $17 billion, according to HDFC AMC MD and CEO Navneet Munot. Another cited view says in 2026 so far, domestic institutional investors (DIIs) were net buyers of over ₹100,000 crore, absorbing part of the FPI selling during risk-off phases. This balance between foreign outflows and domestic inflows is presented as a central reason price declines were limited.

Market impact: indices, flows, and currency linkages

From 22 May 2025 to 22 May 2026, FPIs withdrew $19.94 billion, or ₹365,000 crore, from Indian secondary markets, as per the cited data. Over the same period, mutual fund-led DIIs net invested ₹898,000 crore. Despite those domestic inflows, the outflows are linked to the Nifty slipping almost 4% to 23,719.30 over the past year through the stated Friday. The article also explains the currency mechanism: when foreign investors sell Indian stocks, they convert rupees into dollars, increasing demand for dollars and weakening the rupee. Jefferies is cited as saying Indian retail investors may have indirectly contributed to rupee depreciation through SIP-driven equity buying that was met by foreign selling.

Ownership shifts and what the data implies

Beyond daily flows, the article highlights longer-term positioning changes. It states FPI ownership in NSE-listed companies fell to 16.9% in the second quarter of FY26, the lowest level in over 15 years, per NSE data. It also reports FPI stakes in the Nifty 50 and Nifty 500 slipped to 24.1% and 18%, respectively, described as over 13-year lows. On the domestic side, total DII ownership is cited at 19%, ahead of FPIs for five consecutive quarters. SEBI Chairman Tuhin Kanta Pandey is cited saying retail investors and mutual funds together hold 36% of Nifty 50 free-float market capitalisation.

Key numbers at a glance

Why this matters for investors

The core takeaway is that performance comparisons depend heavily on portfolio construction and currency. FPIs looked better on rupee returns when Nifty-heavy positions led the market, but dollar returns were dragged down as the rupee weakened. Meanwhile, the persistence of domestic buying through mutual funds and SIPs reshaped how the market absorbed large foreign exits. The data also suggests a structural shift in ownership, with domestic institutions and retail investors increasing their influence on free-float market capitalisation. Near term, the article flags index leadership as an important variable, especially with broader markets outperforming the Nifty early in 2026.

Conclusion

FPIs delivered stronger rupee returns than mutual funds last year despite a large exit, largely because large-cap Nifty stocks led performance. But the weaker rupee meant foreign investors faced sharper losses in dollar terms. In 2026, heavy selling continued, while domestic mutual fund and SIP flows provided support and contributed to an evolving ownership mix. Investors will be watching whether broader-market outperformance persists beyond the first quarter and how continued FPI outflows interact with currency movement and earnings expectations.