Why Are Equity Mutual Funds Under Pressure?

Several recent developments indicate rising stress in the equity mutual fund segment.

Market Volatility Has Increased

Indian markets witnessed heavy selling towards the end of February 2026. On February 27, the Sensex fell 961 points and Nifty dropped 318 points, wiping out nearly ₹5 lakh crore in investor wealth in a single session .

Earlier in the month, markets also saw a sharp fall with Nifty slipping below 25,500 amid IT sector weakness and volatility spike .

High volatility directly impacts equity mutual fund NAVs, especially:

• Midcap funds

• Smallcap funds

• Sectoral/thematic funds

Equity Mutual Fund Inflows Are Moderating

According to AMFI data, equity mutual fund inflows declined 6% in December 2025 to ₹28,054 crore compared to November .

Earlier data also showed:

• October 2025 inflows fell 19% month-on-month to ₹24,690 crore

• This marked the third consecutive month of moderation

While inflows are still positive, the slowdown signals:

• Profit booking

• Investor caution

• Reduced aggressive buying

FII Selling & Global Uncertainty

Recent selloffs were triggered by:

• FII selling pressure

• Weak global markets

• Geopolitical tensions

• Rising volatility (India VIX up sharply)

Foreign Institutional Investors play a major role in Indian equities. When they reduce exposure, equity funds also feel the pressure.

Is SIP Money Slowing Down?

Interestingly, SIP culture remains relatively strong despite volatility.

Earlier AMFI data showed SIP inflows crossing ₹27,200 crore in June 2025 .

This indicates:

• Retail investors are still committed to long-term investing.

• Panic withdrawals are limited.

• Long-term confidence in equity remains intact.

However, if volatility continues, new SIP registrations may slow temporarily.

What This Means for Different Types of Investors

1. New Investors

If you started investing in 2024–25 during a bull run:

• You may see negative short-term returns.

• Midcap/smallcap funds may correct more sharply.

• Portfolio volatility will feel uncomfortable.

But remember: Equity is a long-term asset class.

2. SIP Investors

This phase can actually benefit SIP investors.

Why?

• Market corrections allow buying at lower NAVs.

• Rupee-cost averaging works better in volatile markets.

• Long-term compounding improves when you accumulate units during dips.

3. Lump Sum Investors

If you are planning to invest a large amount:

• Avoid investing 100% at once.

• Consider staggered entry (STP approach).

• Focus on diversified large-cap or flexi-cap funds.

Which Equity Categories Are Most Affected?

Based on recent trends:

Midcap & Smallcap Funds

• More sensitive to volatility.

• Sharp corrections during FII selling.

• High risk but long-term growth potential.

IT & Sector Funds

IT stocks have been under pressure due to global concerns and AI disruption fears .

Sectoral funds can face higher drawdowns.

Large Cap & Flexi Cap Funds

• More stable compared to mid/small caps.

• Better suited for conservative equity investors.

Should You Stop Your SIP Now?

Short answer: No, unless your financial goals have changed.

Historically:

• Markets go through correction cycles.

• Volatility is temporary.

• Long-term equity growth remains intact.

Research shows fund managers actively adjust liquidity and portfolio allocation during inflow/outflow cycles to manage performance .

This means professional fund management still plays an important role during turbulent times.

Key Risks to Watch in 2026

Here are the main triggers investors should monitor:

✔ Continued FII outflows
✔ Global recession fears
✔ Rupee depreciation
✔ Crude oil price spike
✔ Geopolitical tensions
✔ Earnings slowdown

If these factors worsen, equity mutual funds may see extended consolidation.

Smart Strategy for 2026 Investors

Here’s what disciplined investors can do:

1. Review Asset Allocation

Don’t put 100% in equity. Maintain balance:

• Equity

• Debt funds

• Gold ETFs

2. Avoid Overexposure to Small Caps

If smallcaps exceed 25–30% of portfolio, rebalance.

3. Stay Consistent With SIP

Corrections create future wealth opportunities.

4. Focus on Long-Term Goals

Equity works best over:

• 5 years+

• 7–10 years ideal horizon

Is This a Buying Opportunity?

Corrections often create opportunity.

When markets correct due to:

• Sentiment

• Global volatility

• Short-term panic

Long-term investors benefit.

However:

• Avoid aggressive leverage.

• Avoid panic buying.

• Invest gradually.

Expert View: What History Tells Us

Indian equity markets have seen:

• 2008 crash

• 2013 taper tantrum

• 2020 COVID crash

• 2022 global tightening

Each time, markets recovered and made new highs.

Equity mutual funds remain one of the most effective wealth-building tools for disciplined investors.

Final Thoughts

Yes, equity mutual funds are under pressure in early 2026 due to:

• Market volatility

• FII selling

• Slowing inflows

• Sector weakness

But this is not the first correction — and it won’t be the last.

If your investment horizon is long-term, staying disciplined is more important than reacting emotionally.