Sovereign Funds Pause India Inflows Amid 2025 Volatility

In 2025, there was a significant slowdown in foreign investment in Indian markets due to foreign sovereign wealth funds experiencing their first asset losses since 2018. In addition, equity holdings were down following a number of years of aggressive investment into sovereign wealth funds that resulted in an overall investment increase of almost 170%, and a nearly 60% increase in central bank equities during the same period.

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Sovereign Wealth Funds Retreat

Over the past, total assets recorded by sovereign wealth funds declined by approximately 2.3%, with the equity exposure of sovereign wealth funds down approximately 1.8%. This was the first decline since 2016. The peak in sovereign wealth fund holdings occurred in 2024 when they crossed above ₹5 lakh crore. 
The largest contributors to sovereign wealth fund declines include Singapore sovereign funds as well as the Abu Dhabi Investment Authority, Kuwait Investment Authority, and Norway's sovereign pension fund, which are all more conservative as a result of India's comparatively below-average performance with respect to emerging markets.

Central Bank Equity Fund Declines

In addition, in 2025, foreign central bank equity assets declined by approximately 14%, or a decline of approximately 14% from the previous three years. This decline in foreign central bank equity assets is consistent with the overall trend in foreign institutional investment in the last approximately seven years, as foreign institutional investors maintain the flexibility to pursue opportunities across a variety of global markets rather than enforcing a single market mandate.

Market Headwinds Dominate

Equity benchmark indices in India increased by more than 10%; however, mid-caps returned only 1.1%, and small-caps declined 6.6%. High valuations, earnings downgrades, slow-growth outlook for FY26 and large-scale selling by Foreign Institutional Investors (FIIs) caused significant capital to be allocated to other areas/Countries. Low allocation to the AI theme relative to global peers having larger allocations and better technology momentum hurt the relative performance of mid and small caps.

Pension Funds Buck Trend

Foreign Pension funds continued to add to their equity allocations, although at the lowest growth rate seen in the last three years (14%). The long-term investment horizon of foreign pension funds means that they will continue to flow money into both equities and bonds regardless of short-term volatility.

Strategic Rebalancing

By combining foreign pension funds, sovereign wealth funds, central banks, and over 51% of government-owned entities, the total asset allocation is approximately 18.5% of total Foreign Portfolio Investment (FPI) under custody in India. 
Mutual funds in India absorbed the selling pressure created by Foreign Investors and Sovereign Funds (approximately ₹4.1 lakh crore in inflows), which helped to stabilise the Indian equity markets. The future revival of the equity markets in India in 2026 is dependent upon the recovery of earnings, the resolution of U.S. tariffs, and the strengthening of the Indian rupee against the U.S. dollar.