India's mutual fund industry is witnessing one of the strongest domestic liquidity cycles in its history, but investors are increasingly facing an uncomfortable reality: returns have failed to keep pace with the surge in inflows. According to Elara Capital, aggregate equity fund returns have remained stuck near the "zero-return zone", raising questions about how long retail investors will continue to pour money into equities without meaningful gains.

Strong inflows, muted rewards

Retail investors have repeatedly embraced the "buy-on-dips" strategy over the past 18 months, stepping up investments whenever markets corrected. Active equity inflows surged to nearly Rs 40,000 crore a month during the March-April correction before normalising to Rs 22,900 crore in May. Despite the moderation, flows remain close to their three-year average and have not broken below that range since March 2018.

However, the surge in money has not translated into higher returns. Elara noted that one-year returns for equity schemes have largely stayed in the range of -3% to 7% for the past 15 months, despite sustained inflows.

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Liquidity support persists, but NAV growth doesn't

One of the report's most striking observations is that aggregate net asset values (NAVs) of active equity schemes are still below their September 2024 peak. Historically, strong inflows and rising NAVs have reinforced each other. This time, however, liquidity appears to be supporting valuations rather than generating fresh gains.

According to Elara, incremental flows are increasingly being absorbed by market supply, limiting the ability of fresh money to drive returns. As a result, investors who have aggressively deployed capital have yet to see commensurate rewards.

Debt funds are outperforming equity

Adding to the challenge, equity funds have been underperforming debt funds on a one-year rolling basis since February 2025, a trend that has persisted for more than 18 months.

This relative underperformance comes at a time when systematic investment plan (SIP) contributions remain robust. SIP inflows stood at Rs 30,954 crore in May, highlighting the continued faith of retail investors in long-term wealth creation.

Patience may eventually wear thin

Elara cautioned that the success of the buy-on-dip strategy has so far been supported by investors' expectation of a quick rebound in returns. But if markets fail to generate meaningful gains over the coming quarters, investor patience could begin to be tested.

A prolonged phase of weak performance may lead to slower incremental allocations and eventually raise the risk of redemptions from investors who have continued to deploy capital without seeing corresponding returns.

For now, India's mutual fund boom remains intact. But as returns remain elusive despite abundant liquidity, the industry's biggest challenge may not be attracting new money—it may be ensuring existing investors remain patient enough to stay invested.

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