Is the current market correction a speed breaker for India’s mutual funds industry?

The IndusInd Bank fiasco could not have come at a worse time. The bank’s stock plunged more than 27% to a four-year low last week, following its disclosures around derivatives-related discrepancies to the tune of Rs 1,530 crore. This sent shockwaves through the equity markets, with investors scrambling for a sell-off.

The spotlight immediately fell on fund houses that had substantial exposure to the IndusInd stock. As many as 35 asset management companies (AMCs) and roughly 360 mutual fund (MF) schemes held IndusInd Bank, according to industry estimates. Overall, MFs were holding more than 20 crore IndusInd shares in their portfolios, with a total market value of ~Rs 19,900 crore in February.

India’s nearly 5 crore mutual fund investors, who were already hitting the panic button—SIP inflows touched a three-month low in February—due to markets tanking over the last few months, have every reason to be stressed. Especially those that have opted for funds such as ICICI Pru MF, SBI MF, HDFC MF, UTI MF, and Nippon India MF, which have large exposures to the said bank.

But this is not a cautionary tale about IndusInd Bank alone. In fact, that debacle might end up as a footnote in the continuing chaos of India’s capital markets, with the Nifty 50 going through its longest monthly losing streak in 30 years—it has fallen 15% from record highs in September 2024.

What is more worrisome is that these significant market corrections might even be undoing some of the good financial and investing behaviour of large swathes of India’s retail investors who had warmed up to mutual funds in a big way, with the unique investor base in MFs more than doubling since March 2020.

Not only are lakhs of monthly SIPs being cancelled right now, but overall fund inflows are also falling. In February, MF inflows hit a 10-month low, with the industry’s total assets under management (AUM) dropping 4% to Rs 64.26 lakh crore from Rs 66.98 lakh crore in January, according to data from the Association of Mutual Funds in India (AMFI). Equity MF inflows declined the most—dropping by 26.1% to Rs 29,303 crore from Rs 39,688 crore a month ago. Compared to October 2024, when equity inflows stood at Rs 41, 887 crore, this drop is even higher at 30%.