Mutual Fund Investors' Buy-on-Dips Strategy Tested with 2-Year Data Analysis

Market Volatility Persists Amid Geopolitical Risks and Inflationary Pressures

The Indian stock market has been experiencing volatility in recent times due to persisting geopolitical risks, increased inflationary pressure, and weak earnings. Despite this, the buy-on-dip behavior of retail investors has strengthened again, with pure equity inflows during March–April accelerating nearly 40% versus the average monthly run-rate of the prior six months. This marks the third major "buy-the-dip" phase witnessed over the past two years, reflecting domestic investors' continued buying market corrections.

Domestic Market in Consolidation Phase

The domestic market has been in a consolidation phase over the last two years, largely due to US tariffs, increased geopolitical tensions, weak earnings, stretched valuations, and the lack of AI trade. The last two-year absolute return of the market benchmark Nifty 50 is just a little over 5%, while over the last year, the index has gone down by over 4%. However, this period has seen strong inflows by domestic investors.

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Buy-on-Dip Behavior Not Rewarding for Investors

While mutual fund investors have been buying the dips aggressively, they have not been rewarded adequately. Elara's analysis shows that most schemes have delivered returns below debt over the last two years. The median two-year CAGR returns only for mid, small, and multicap funds are marginally above fixed deposit returns. Assuming debt generated pre-tax returns of nearly 7–8% (or nearly 5–5.5% post-tax), only a limited set of equity categories and schemes have managed to outperform on a two-year CAGR basis.

Flows Become Key Driver of Returns

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Flows have become a key driver of returns, with categories attracting stronger incremental liquidity delivering relatively better performance. This is most visible in mid and small-cap funds, where sustained and accelerated inflows during corrections have translated into comparatively stronger returns versus other categories.