Explainer: Why pension funds are becoming key buyers of India's large-cap stocks

For every ₹100 of Indian equities purchased by mutual funds in 2024, non-mutual fund domestic investors accounted for around ₹16. This year, that figure has risen to ₹65, highlighting a shift in the sources of domestic equity demand.

Harish Krishnan, CIO, Equity, Aditya Birla Sun Life AMC, highlighted this trend in an interview with CNBC-TV18, pointing to the growing role of pension funds, insurance companies and banks in Indian equities. He believes the trend could support markets over the longer term, even as near-term uncertainty persists.

What is driving the change in domestic equity buying?

The increase in purchases by non-mutual fund domestic investors suggests that equity demand is coming from a broader range of domestic institutions, rather than mutual funds alone.

Krishnan said the change has been particularly noticeable among pension funds, which have increased their allocations to Indian equities as their investment pools have grown.

The scale of this shift is evident in the large-cap segment. Over the past 12 months, pension fund purchases of the top 100 companies were higher than mutual fund purchases of the same companies, according to Krishnan.

This finding highlights the growing importance of pension funds in the market, alongside the steady investments made through mutual funds.

Why does pension fund investment matter?

Krishnan believes pension funds could be an important source of long-term capital for Indian equities because of their investment horizons.

“While SIPs themselves represent a long-term phenomenon with reasonable consistency, I think pension fund investment horizons are even longer term,” he said.

Systematic investment plans (SIPs) have attracted considerable attention as a source of sustained investment in equities. Krishnan's argument is that pension funds bring another source of long-term money into the market, one that investors may not be examining as closely.

He expects domestic investment flows to offer a positive surprise over time, although the trend does not necessarily mean that markets have reached the end of their correction.

Why might domestic buying not be enough to prevent further weakness?

Despite the changing pattern of domestic investment, Krishnan pointed to several factors that continue to cloud the near-term outlook for Indian equities.

Concerns around tariffs have been reasonably resolved, while developments related to the artificial intelligence trade have also been moving in India's favour. However, crude oil prices have emerged as another concern, and the geopolitical situation, particularly the crisis in West Asia, remains uncertain.

There is also a question about how much further dynamic asset allocation funds can increase their equity exposure.

According to Krishnan, these funds are already investing an average of 65–70% of their portfolios in equities. Since the category can increase its allocation to 80%, the remaining headroom is less than 10–15 percentage points.

In previous market cycles, average allocations were around 50%, leaving these funds with considerably more room to increase their equity exposure. Their current allocation levels suggest that the potential for additional buying may be more limited this time.

What does this mean for Indian equities?

The growing contribution of pension funds and other domestic institutional investors offers another source of support for Indian equities. However, it does not eliminate the risks posed by crude oil prices and geopolitical uncertainty, or establish that the market correction is over.

Krishnan's broader point is that investors should look beyond mutual fund flows to understand the changing sources of domestic equity demand.

“There has been a meaningful increase in allocations by many pension funds,” he said, adding that these funds had grown significantly and were moving substantially into Indian equities.

Whether this shift translates into sustained support for the market will depend on how domestic investment flows evolve alongside the macroeconomic environment.