Banking, financial services and insurance (BFSI) thematic funds led all mutual fund categories in May 2025, delivering returns of 5.5% and attracting ₹1,013 crore in net inflows, according to a report by Vallum Capital released on Saturday, 20 June. The strong performance was driven largely by the category's concentration in large-cap stocks, which continued to command the bulk of retail investor flows.

Performance vs Inflows: A Widening Disconnect

The Vallum Capital report flagged a notable anomaly in May's data: micro-cap funds were the month's top performers, returning 5.7%, yet attracted only marginal inflows. Small-cap funds returned 3.4% and drew ₹2,229 crore. Meanwhile, large-cap funds returned just 1.5% — the weakest cap-wise monthly return across categories — yet pulled in a commanding ₹8,565 crore, nearly four times what small-caps received and more than double the inflows into mid-caps.

Mid-cap funds gained 1.6% with ₹3,898 crore in inflows. Flexi-cap funds, which returned 2.1%, attracted ₹5,350 crore, while Large and Mid-cap funds collected ₹2,617 crore at 1.9% returns.

Why Large Caps Keep Attracting Capital Despite Lower Returns

The report attributed the inflow skew to the structural mechanics of Systematic Investment Plans (SIPs). Standing instructions on large-cap and flexi-cap index trackers mechanically route retail savings to the largest, most liquid end of the market — regardless of where monthly performance is actually being generated.

As a result, India's biggest fund category by assets under management — large-cap funds at over ₹10.5 lakh crore — continues to accumulate capital even in months where smaller, higher-performing categories remain undersubscribed. This structural bias, critics argue, may be leaving meaningful return opportunities on the table for passive SIP investors.

SIP Flows and Industry AUM

SIP contributions for May hit ₹30,954 crore, up 16% year-on-year, with 9.64 crore active SIP accounts. India's mutual fund industry held firm at ₹81.58 lakh crore in total assets as of May-end, and equity funds recorded their 63rd consecutive month of net positive inflows — underscoring the resilience of domestic retail participation.

Institutional Flows and Sectoral Standouts

Foreign institutional investors (FIIs) were net sellers in May, offloading equities worth ₹32,963 crore. Domestic institutional investors (DIIs), however, more than offset the outflows, purchasing ₹82,165 crore worth of equities during the month.

Within thematic categories, PSU Bank funds gained 6.9% and collected ₹436 crore, while Private Bank funds rose 6.5% and drew ₹329 crore — together contributing ₹765 crore to bank-focused fund inflows. Transportation and logistics funds gained 4.4% and attracted ₹194 crore, while auto funds posted gains of 4.2%.

With SIP flows at a record pace and domestic institutions absorbing FII selling, the structural underpinning of Indian equity markets remains intact — though the performance-inflow mismatch points to a conversation the industry may need to have with retail investors about active allocation.