Mumbai: Indian mutual funds are closing in on foreign portfolio investors (FPIs) in their share of domestic equities, with the ownership gap narrowing to around 230 basis points, the lowest on record.

The share of mutual funds' holdings in Indian equities rose to a record 11.7% in September, while that of FPIs fell below 14%, according to NSDL data. The FPI share has declined from a record 20% in May 2021, while the mutual fund share has climbed from around 7% during the same period. In January, the mutual fund share was 11%.

The contraction in the ownership gap is an outcome of record selling by foreign investors along with unabated purchases by domestic mutual funds thanks to the deluge of retail flows into their equity products.

ET Bureau

"In every market, normally local investors dominate and the same trend is emerging in India," said Samir Arora, founder and fund manager at Helios Capital Management. "It is reasonable to expect that in the medium term local institutional investors will own more of the market than foreign investors."

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FPIs' total equity assets under custody stood at ₹66.18 lakh crore in September, the lowest since March 2026, compared with a record ₹77.96 lakh crore in September 2024, when FPIs accounted for around 16.4% of Indian equities.

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Meanwhile, mutual funds' equity assets stood at around ₹55.14 lakh crore, up from around ₹20 lakh crore in April 2022. The corpus doubled to around ₹40 lakh crore by January 2024 and crossed ₹50 lakh crore in October 2025.

"Over time, mutual funds, high-net-worth individuals and family offices collectively are likely to account for a larger share of the market," said Ritesh Jain, founder of Canada-based Pinetree Macro.

The changing ownership pattern is more pronounced among Nifty 500 companies, where domestic institutional investors (DIIs) have overtaken FPIs. DII holdings rose for the 9th consecutive quarter to a record 21% in Q1FY27, while FPI holdings fell to 17%, according to a Motilal Oswal Financial Services note.

The changing composition of the Indian economy could also be influencing FPI investment patterns. Foreign investors, which have historically had significant exposure to banks and IT companies, are now looking beyond these established sectors.

The decline in FPI ownership has been visible across several key sectors, including IT, FMCG, consumer services, realty and financials. But, the trend has not been uniform, with foreign investors increasing their holdings in capital goods, metals and mining, telecom, services and healthcare.

A recovery in corporate earnings will be key to a return of foreign investor appetite for Indian equities at a time when Asian markets such as Taiwan and Korea are hogging the limelight, boosted by AI-centric investments.

"If earnings grow at around 14-15% annually and the currency depreciates by around 2-3% a year, the resulting return for foreign investors would still be around 12%," said Arora.