Equity markets & India's decade: What lies ahead for mutual fund investors

The focus should be less on finding perfect entry point and more on staying invested in an economy that is compounding steadily—one disciplined SIP at a time.

India’s equity markets are entering a structurally stronger phase one defined less by liquidity and more by earnings recovery, corporate resilience, and steady domestic participation.

DII inflows via mutual fund SIPs exceeding ₹20,000 crore a month have become a stabilising force, cushioning the market during FII outflows.(HT)

Over the next 5-7 years, outlook for equities remains constructive, supported by improving fundamentals, fair valuations, and balanced investor sentiment. The current market conditions suggest that India is still in the middle of a multi-year bull phase rather than nearing the end of one.

Recent research analysing earnings cycle, valuations, and sentiment indicates a market that is fundamentally healthy and midway through its expansion. On the earnings front, corporate profitability has seen a sharp revival—corporate profit-to-gdp ratio has risen from a low of 1.6% in FY20 to 5.1% in FY25, close to the earlier peak of 6.4%. The BSE 100’s average return on equity has almost doubled from 9% in 2020 to 18.4% in 2025, signalling improved margins and efficiency. Corporate leverage is at its lowest in 15 years, pointing to robust balance sheets and greater headroom for new investments. The capex cycle is gradually reviving, with gross fixed capital formation at 30% of GDP compared to the previous peak of 35.8%, while credit growth remains modest at around 10% year-on-year well below its historical highs above 30%.

Together, these indicators suggest India’s earnings growth still has significant room to run, backed by rising formalisation, digital adoption, and expanding manufacturing activity.

Valuations, meanwhile, appear reasonable. Based on a blend of indicators such as market cap-to-gdp, price-to-earnings, and bond yield-to-earnings yield, Indian equities currently sit in a neutral zone. While headline valuations may seem elevated, they largely reflect optimism about sustainable profit growth rather than speculative excess. This makes the market more earnings-driven and less dependent on multiple expansion for returns.

Investor sentiment remains steady. Domestic institutional investors continue to provide a reliable flow of capital, while foreign institutional investors remain cautious. FII ownership in Indian equities has dropped to a 14-year low of 17.5%, down from a peak of about 22%. That presents potential for renewed foreign participation when global liquidity improves.

At the same time, domestic inflows through mutual fund SIPs now exceeding ₹20,000 crore a month have become a stabilising force, cushioning the market during foreign outflows. The steady rise of household savings into equity mutual funds is gradually transforming India’s markets from foreign driven to domestically anchored, reducing volatility and deepening market resilience.

For investors, the implication is clear: this is a market that rewards consistency over timing. Maintaining one’s original equity–debt mix and rebalancing only if it diverges meaningfully say, by more than 5% is a sound approach.

Continuing SIPs remains one of the best strategies to harness compounding through different market phases. For new allocations, a staggered deployment investing the debt portion immediately and spreading equity investments over a few months through systematic transfers helps manage volatility while maintaining participation.

What distinguishes this cycle from previous ones is the maturity of India’s capital markets. The mutual fund industry’s assets have grown nearly seven-fold over the past decade, reflecting both rising financial awareness and a growing preference for market-linked savings. With deeper participation from smaller cities and younger investors, India’s equity ownership base is becoming more long-term in nature.

In the coming years, India’s story will not be about speculative rallies but about institutionalised, earnings-backed growth.

As corporate fundamentals strengthen and domestic capital continues to flow, corrections are likely to be shallower and recoveries quicker.

For long-term investors, the focus should be less on finding the perfect entry point and more on staying invested in an economy that is compounding steadily—one disciplined SIP at a time.

The authors are FundsIndia Group CEO Akshay Sapru and FundsIndia Senior Manager (Research) Jiral Mehta.