As India's stock market recently entered a phase of sluggish growth, a notable shift in investor sentiment is underway. In January, inflows into gold exchange-traded funds (ETFs) unusually surpassed those into equity mutual funds, indicating a rapid move away from high-risk, high-return strategies toward safe-haven assets.
The primary driver of this trend is the recent weak performance of Indian equities. Despite a growth-supportive budget announcement and multiple trade agreements with the EU and US, these developments have failed to fully ignite market enthusiasm. In February, Indian stocks continued to underperform broader Asian markets, with weakness in key segments like small-cap stocks further dampening retail investor confidence.
In contrast, precious metals are gaining favor due to persistent geopolitical risks and macroeconomic uncertainty. Analysts note that gold and silver ETFs have not only shown strong recent performance but are also acting as safe harbors for capital. This rotation suggests that gold will maintain its short-term advantage until broader corporate earnings growth provides sustained momentum for equities.
Market attention is now focused on upcoming U.S. employment and inflation data. These figures will offer further signals regarding the Federal Reserve's policy outlook and could directly influence fund flows into emerging markets, including India.
Weak stock returns are prompting a shift from equities to gold. The underperformance of Indian stocks relative to investor expectations is the direct cause of this capital rotation. January data confirmed that gold ETFs attracted more funds than equity mutual funds, marking a clear change in investment preference. Although government budgets and trade deals have provided positive signals and reduced some uncertainty, analysts widely agree that sustaining a stock market rally requires broader corporate profit growth. Until then, gold's recent strong performance and safe-haven characteristics make it more attractive.
Simultaneously, investor patience with small-cap stocks is wearing thin. A longtime favorite of Indian retail investors, small-cap mutual funds saw their lowest monthly inflows in January since June 2024. Over the past year, the small-cap index returned only 4–6%, significantly lagging the Nifty 50's 11% gain and the 15–17% growth of major mid-cap indices. While two-to-three-year returns appear healthy, recent persistent weakness is pushing investors to seek better returns elsewhere.
The government's revival of its asset-sale program also presents a double-edged sword for the market. Officials announced the sale of a 5% stake in state-owned Bharat Heavy Electricals on February 11–12, with a floor price of 254 rupees per share, aiming to raise over 25 billion rupees. This is the first divestment action since last week's budget set a target of raising 800 billion rupees through stake sales in the next fiscal year starting in April.
While these sales help alleviate pressure on government revenues from tax cuts, they increase the supply of shares in the market. An oversupply is considered a key reason the benchmark indices have struggled to break out of their recent trading range. Thus, while bolstering state coffers, this policy also restrains short-term upside for stocks.
Against the broader market weakness, real estate investment trusts (REITs) have emerged as another bright spot for investors. According to a Nuvama report, office leasing remained active in the December quarter, driven by strong demand from global capability centers and domestic corporate expansion. All Indian REITs are now in growth mode. In stark contrast to the main market's struggles, stocks like Embassy Office Parks and Brookfield India have gained approximately 25% over the past 12 months.
Furthermore, strong policy support from the central bank and market regulators has deepened interest in this segment. A consortium led by Carlyle Group agreed to acquire a 73% stake in Nido Home Finance for about 21 billion rupees, further underscoring the sector's appeal.
Meanwhile, investor sentiment in India's primary market appears more cautious and selective. Although an AI boom drove record listings in Hong Kong in January, India's first AI-focused IPO, Fractal Analytics, received a tepid response. Despite having anchor investors like Morgan Stanley and Goldman Sachs, the offering was only about 19% subscribed by the end of its second day.
Bankers note that this cool reception is not specific to one deal but reflects broader investor hesitation toward high-valuation technology offerings. Although institutional investors often bid on the final day, the current environment in the equity capital market remains characterized by caution.