The great Indian equity story is sobering, or so it seems and retail investors may be caught in the crossfire.
A new analysis from Kotak Institutional Equities reveals that investors who started systematic investment plans (SIPs) in Indian equities after calendar year 2023 are now staring at modest returns. The weighted-average internal rate of return (XIRR) for these investors has plummeted from roughly 13% in early 2024 to barely 9% by June 2025, according to the report dated January 27, 2026.
The Great Divergence
The Indian market has delivered weak absolute performance and sharp underperformance versus global markets for approximately 18 months now. Yet through it all, domestic institutional investors (DIIs)—acting on behalf of retail investors—have been relentless buyers, pumping in US$5.6 billion year-to-date in 2026 alone. This comes atop massive inflows of US$90.2 billion in 2024 and US$62.9 billion in 2023.
Foreign portfolio investors (FPIs), by contrast, have voted with their feet, pulling out US$3 billion so far this year and a staggering US$18.8 billion in 2025.
“The price-agnostic investment behavior of Indian retail investors through mutual funds has sustained the high multiples in most parts of the Indian market for the past 2-3 years,” the Kotak strategists write, led by Sanjeev Prasad. But they pose a critical question: How long can this continue?
Between a Shallow Hole and a Deep One
The framing is stark: “Indian retail investor standing between a shallow hole and a very deep hole.” With trailing 18-month returns now disappointing, will retail investors continue their aggressive purchases or finally pull back?
The stakes couldn’t be higher. The Nifty-50 index currently trades at 19.9 times estimated FY2027 earnings and 17.4 times FY2028 earnings—elevated by historical standards, despite the recent correction. The index has underperformed virtually every major global market over the past 1, 3, 6, and 12 months, according to the report’s comprehensive market data.
Valuations Still Stretched Despite Correction
Most troubling is the valuation backdrop. Large-cap consumption stocks are trading at “expensive valuations,”
“We wonder if the recent correction in and continued large underperformance of the Indian market versus other markets simply reflects (1) a ‘temporary’ blip in the market or (2) the start of a ‘permanent’ reset in multiples to their ‘correct’ levels,” the analysts write. “Several sectors and stocks would see an even larger correction in multiples (price and/or time) if the latter were to be true.”
The Disruption Nobody’s Talking About
The report points to a more ominous structural concern: “the growing disruption threats across sectors and the lack of meaningful investment by Indian companies to fight the disruption threats will eventually lead to a structural decline in the multiples.”
This warning suggests that India’s valuation premium may not just be a cyclical phenomenon but could face a permanent reset as competitive threats and technological disruption reshape corporate profitability.
One Silver Lining: Earnings Are Stabilising
There is one silver lining. Third-quarter fiscal 2026 earnings have come in 3.7% ahead of expectations for the 19 Nifty-50 companies that have reported so far. The strategists expect net profits to grow 16.8% in FY2027 and 14.4% in FY2028, suggesting earnings are stabilizing after a prolonged period of downgrades.
But earnings growth alone may not be enough to prevent multiple compression. India trades at a massive premium to emerging markets—roughly 70-100% higher on a price-to-earnings basis over the past year.
The Critical Test Ahead
For retail investors who have powered India’s equity boom with unwavering faith and disciplined monthly contributions, the next few quarters will be crucial. The question is whether retailers can psychologically continue buying if returns remain muted and uncertainty persists.
As the Kotak report makes clear, the investment behavior of retail investors “will be critical for the Indian market, given the negative view of FPIs on India, which may extend for a while.”
Note the tug-of-war between relentless domestic buying and persistent foreign selling creates an unstable equilibrium. Be mentally prepared for increased volatility and potentially deeper corrections before the market finds its footing.
The bottom line: India’s long-term growth story remains intact, but the easy money from multiple expansion has likely been made. The next phase of wealth building will require patience, discipline, and realistic expectations.
