Passive funds under-allocate India by 57% relative to real market cap: Ionic Wealth

Fresh updates from the financial markets indicate that Global passive funds tracking broad equity benchmarks have a significantly smaller allocation to India than the country’s share of global market capitalisation and economic output, leaving the world’s fastest-growing major economy structurally underrepresented in benchmark portfolios.

India’s effective weight in global equity benchmarks is around 1.3%, based on its 11.3% weight in the MSCI Emerging Markets Index and the roughly 11% share of emerging markets in the MSCI All Country World Index (ACWI), according to MSCI data and brokerage research from Motilal Oswal Financial Services and JM Financial.

That compares with an estimated 3% share of global market capitalisation and roughly 3% of global nominal GROSS DOMESTIC PRODUCT in dollar terms.

India’s weight in the MSCI EM Index has fallen to 11.3% in August 2026 from 16.2% a year earlier. The weight fluctuates with market movements and changes in index composition.

“India's share in MSCI EM has fallen to around 11%, though this keeps on fluctuating, and MSCI EM in turn has a similar weightage in MSCI ACWI, which means India's share in MSCI ACWI is in the 1.3% approximate range,” stated Harsh Gupta Madhusudan, fund manager and chief India strategist at Ionic Wealth.

“In actual market cap share of the world, it is closer to 3%,” he stated, adding that India’s firm economic and earnings expansion, combined with a potential turn in the dollar cycle, could make the experience of the 2000s more relevant for Indian equities over the next decade.

The gap between India’s economic and market footprint and its weight in global benchmarks is important because passive funds generally allocate according to index weights rather than making independent country-level decisions.

FIIs sell $85 billion in secondary market over five years

The structural underweight has coincided with a prolonged shift in how foreign market participants have allocated money to Indian equities.

FIIs sold a net $85 billion of Indian secondary-market equities between September 2021 and August 2026, according to Motilal Oswal data. During the same period, they invested $42 billion in primary-market offerings, including IPOs and qualified institutional placements.

Foreign selling accelerated after the September 2024 market peak. During the past two years, FIIs have sold a net $70 billion of secondary-market equities, including $24.1 billion in calendar 2026 so far.

JM Financial estimates that FIIs sold a net Rs 3.38 lakh crore ($36.5 billion) in secondary-market equities in the 12 months through August, while investing around Rs 80,000 crore ($8.7 billion) in primary-market issuances.

The primary-market investments as a result offset 23.6% of their secondary-market selling over the period.

Foreign ownership falls to 10-year low

The sustained selling has additionally changed the institutional ownership structure of Indian equities.

FII ownership declined to 14.2% in August 2026 from 20% in August 2016, a slide of 580 basis points.

Domestic institutional market participants, in the meantime, accounted for 18.9% of Indian equity ownership as of June 2026. DIIs first overtook foreign market participants in December 2024 and have since widened their ownership lead to 4.7 percentage points.

Total FII equity assets under custody stood at Rs 70.4 lakh crore.

Recent foreign buying is concentrated in large caps

Foreign flows have nevertheless started to turn. FIIs recorded net inflows of $2.5 billion in July and $2.4 billion in August, marking two consecutive months of buying after an extended period of selling.

The August inflows were concentrated in a handful of large sectors, according to Motilal Oswal.

Financial services attracted $1.1 billion of net foreign buying, while consumer services and healthcare drew $882 million and $622 million, respectively. Together, the three sectors accounted for 84% of total foreign inflows during the month.

Autos and technology additionally moved into positive territory, with net inflows of $326 million and $430 million, respectively.

The buying remained selective. Telecom recorded net outflows of $522 million, while FMCG and oil and gas saw foreign outflows of $201 million and $185 million, respectively.

The renewed interest in large caps comes as valuations have eased relative to their historical averages. The Nifty 50 trades at 18.3 times one-year forward earnings, a 13% discount to its 10-year average of 20.9 times, according to Motilal Oswal.

The broader market stays more expensive on the same measure. The Midcap-150 trades at 27 times forward earnings, a 9% premium to its 10-year average, while the Smallcap-250 trades at 24.1 times, a 31% premium.

Motilal Oswal anticipates Nifty 50 earnings to compound at around 15% annually between FY26 and FY28, keeping large-cap earnings expansion relatively well supported as foreign market participants begin to return to the segment.