The ongoing US-Iran conflict has not only impacted Indian investor portfolios but has also led to record outflows and reduced equity inflows. A significant indicator of this uncertainty is the net equity inflow figure for May 2026, which fell to a twelve-month low of Rs 22,908 crore. This represents a 40% decline from the Rs 38,440 crore recorded in April, marking the steepest month-on-month drop since May 2023.
Geopolitical Tensions and Market Volatility
Experts attribute this decline to heightened geopolitical tensions and increased market volatility. According to data from the Association of Mutual Funds in India (AMFI), lump-sum investments were particularly affected. Rising crude prices, a weakening rupee, and periodic market corrections have clouded short-term visibility. Unlike Systematic Investment Plans (SIPs), one-time investments are more sentiment-driven, with investors often waiting for better entry points during volatile periods.
Category-Wise Inflow and Outflow Details
Among equity-oriented categories, flexi-cap funds attracted the highest inflows at Rs 5,176 crore, though this was nearly 49% lower than the previous month. Small-cap funds received Rs 4,946 crore, while mid-cap funds saw inflows of Rs 4,385 crore, both declining by 33% and 28% respectively compared to April. Gold exchange-traded funds (ETFs) recorded net outflows of Rs 725 crore in May, their first monthly outflow in 13 months. Debt mutual funds experienced a sharp reversal, with net outflows of Rs 96,949 crore in May, compared to inflows of Rs 2.47 lakh crore in April.
Dhirendra Kumar, CEO of Value Research, notes: "The real risk this month isn't equity at all. Equity inflows didn't crash; they normalised after a freak-high April and have now stayed positive for 63 straight months. The quieter danger is in debt: since debt funds lost their tax edge, many investors have abandoned the category, some reaching for high-yield bonds in search of lost returns. Debt is the stabiliser. Walking away from it, or buying risky credit dressed up as safe income, raises risk while feeling like caution."
Resilience of SIPs
SIPs, the backbone of the mutual fund industry, showed remarkable resilience. Monthly SIP contributions stood at Rs 30,954 crore, marginally lower than the Rs 31,115 crore in April. However, this marks the second consecutive month of declining SIP contributions, following a record high of Rs 32,087 crore in March.
What Should SIP Investors Do During Market Swings?
Experts warn against panic selling and emphasize maintaining investment discipline. Dhirendra Kumar offers simple advice: do nothing. "An SIP is a standing instruction, and that is its advantage: it keeps buying when prices are low, and the mood is dark, which is exactly when nerves fail. Pause it in a worrying month, and you skip the cheap units, resuming only after prices recover. A headline about US-Iran talks is news about the market's mood, not an instruction about your plan," he says.
May proved this point: 9.64 crore accounts continued investing through a falling rupee and volatile market, keeping SIP contributions above Rs 30,000 crore for the third consecutive month. In hindsight, the right response to almost every recent crisis was to do nothing, adds Kumar.
Mistakes Investors Make
Chirag Muni, Executive Director at Anand Rathi Wealth Limited, says: "Our study shows that if an investor had invested through an SIP in the Nifty 50 Index for 1 year and experienced negative returns, those returns would have turned positive in the range of 17% to 21% if the investment had been continued and held for another 5 years. The key is to avoid panic, stay invested through market cycles and maintain an appropriate allocation across large, mid and small caps within the overall portfolio."
Are Current Market Conditions Creating an Opportunity?
Market experts advise adopting a mindset of finding opportunity in adversity. Prateek Nigudkar, Senior Fund Manager at Shriram AMC, notes that valuations in the large-cap segment appear relatively more comfortable compared to other market segments. "While parts of the mid- and small-cap universe continue to trade at elevated valuation levels, selective opportunities may exist for investors with an appropriate risk appetite and investment horizon," he says.
With the Nifty 50 down around 8% from its peak, current conditions appear more as an opportunity than a risk for long-term investors, according to Chirag Muni. The approach should be clear: rather than trying to time the market, investors should focus on building long-term wealth through diversified equity mutual funds that invest across sectors and market caps. "An ideal allocation of around 50 to 55% in large caps, 20 to 25% in mid caps and rest in small caps can help create a well diversified equity portfolio," Muni advises.
Will Equity Inflows Recover Soon?
Some experts note that foreign outflows were a trend even before the war. Additionally, the traction for global AI stocks may make foreign investors reluctant to invest aggressively in Indian stocks. Prateek Nigudkar explains: "India was witnessing FII outflows even before the war. The conflict accelerated these outflows, as higher energy prices threatened to erode India's relatively strong macroeconomic fundamentals. A peace deal could lead to India seeing some of these flows return, particularly if government and RBI measures, such as FCNR deposits and tax exemptions for investors in sovereign bonds, help stem the rupee's decline."
However, challenges remain. "Cooling energy prices could ease some of the overhang on equities. That said, the challenges of limited AI-related investment opportunities and relatively elevated valuations are likely to persist and may continue to constrain the scale of any large inflows," Nigudkar adds.
For Dhirendra Kumar, to a large extent, the inflows never really left. "The SIP, which reflects ordinary investors, barely moved, down just half a per cent. What fell was lumpy lump-sum money, which always swings with the mood. I'd be cautious about tying the market too closely to one event. Investors who wait for the 'all clear' of a signed deal may simply buy at higher prices, once the cheaper units are gone. I don't think it's wise to forecast monthly flows off geopolitical news, or to build a plan around it. The encouraging part is that the SIP held steady through the uncertainty. That's the number that matters, and it didn't need a peace deal to stay firm," he says.
Chirag Muni also points to the resilience of SIP contributions. "While net equity inflows in May moderated by around 40% to Rs 22,908 crore, SIP contributions continued to remain close to the Rs 31,000 crore mark, a trend that has been sustained over the last 6 months." According to Muni, this indicates that retail investors continue to stay committed to their long-term investment plans, making the recent moderation in inflows appear temporary. "Indian investors have also become far more mature in their approach to equities and a part of the buying during market lows has already happened. This is visible from the strong net equity inflows of Rs 40,450 crore and Rs 38,440 crore recorded in March and April 2026 respectively, which were well above the one year average monthly equity net inflow of around Rs 30,000 crore. Going forward, equity net inflows are likely to gradually recover towards Rs 30,000 crore level as market sentiment continues to improve," he says.
The core strength of SIPs lies in rupee-cost averaging. When markets decline, the same monthly investment buys more units, lowering the average purchase cost. As markets eventually recover, these additional units can enhance long-term returns. From an investor standpoint, the message from experts is clear: SIP investors should remain invested and continue their contributions without interruption, allowing them to benefit from the power of compounding and stay on track toward achieving their long-term financial goals.
(Disclaimer: Recommendations and views on the stock market, other asset classes or personal finance management tips given by experts are their own. These opinions do not represent the views of The Times of India.)
