Notes

The scale of India's mutual fund boom

Sanjiv opens by describing just how dramatically the Indian mutual fund industry has grown in the past few years. Before COVID, the industry's assets stood at roughly fifteen lakh crores. Today, that figure has climbed to nearly eighty lakh crores, a scale he describes as "substantially large." Alongside this, the investor base has expanded from about four crore folios to nearly fourteen crore, though he cautions that folio counts may overstate unique investors since a single person can hold multiple folios under different names.

What stands out to Sanjiv is not just the size of this growth but where it is coming from. He notes that new mutual fund folios are increasingly being opened in states like Uttar Pradesh rather than the traditional financial centers of Bombay or Gujarat. This, in his view, reflects a genuine democratization of the industry.

"The mutual fund industry has democratized. More and more people are participating in the industry."

He also connects this growth directly to the exit of foreign institutional investors from Indian markets. With roughly thirty thousand crores flowing in through SIPs every month, Indian retail investors have effectively absorbed the selling pressure from FIIs, giving them an easy exit route that investors in more restrictive markets like China do not have. Sanjiv is careful to note that people have different views on whether this is a good thing, but factually, mutual funds have taken on that burden. As a result, what used to be a minor part of India's financial markets has now become their most important channel for gathering savings.

From bank deposits to equity: how Indian investing has changed

Turning to how Indians actually invest, Sanjiv draws a generational contrast. Until about ten years ago, most Indians putting money into mutual funds were parking it in debt instruments rather than equity. Their parents, and the parents of what he refers to as Gen Z investors today, largely stuck to bank deposits or government securities, earning modest returns in the range of seven to ten percent.

That has started to change. Newer Indian investors are increasingly participating in the growth of equity markets directly, and as a result, their returns have outpaced what previous generations experienced. Sanjiv also highlights a structural shift working in the background: the Employees' Provident Fund Organisation (EPFO) has started investing part of its corpus into ETFs. This means that even small, ordinary workers, people he deliberately avoids calling "investors" since they are simply having contributions deducted from their pay, are now gaining some indirect exposure to equity markets.

He draws a comparison to the American experience with 401(k) retirement accounts, which became a critical wealth-building tool for the baby boomer generation in the US.

"I hope in the next twenty, thirty years [EPFO's equity exposure] becomes a very critical component for Indian investors."

The home bias problem: gold as a hidden foreign investment

This is where Sanjiv's argument sharpens considerably. He points out that despite the equity participation growing domestically, almost all of it stays within India. Looking at the last three to four years, most global markets have outperformed India substantially. Foreign investors sold out of India, and Indian retail money absorbed that selling, but Indian portfolios themselves have not benefited from the stronger growth happening elsewhere in the world.

The core issue, as he frames it, is a violation of basic portfolio theory: diversification across asset classes and geographies is supposed to protect investors from underperformance in any single market, but Indian investors are structurally prevented from doing this. He notes that a regulatory cap of roughly eight billion dollars on aggregate mutual fund investment outside India, a limit he was personally involved in pushing against when he helped launch the Hang Seng index fund at Benchmark, has now been breached entirely. As a result, mutual funds currently have essentially zero room to invest abroad on behalf of Indian savers. The Liberalised Remittance Scheme (LRS) route technically remains open, but Sanjiv observes that most Indians have not meaningfully used it either, reflecting a strong home bias.

He then makes a striking observation: Indians already are investing outside the country, just not through equities. They do it through gold.

"It's very interesting that Indians intuitively know that basically, just being in the rupee doesn't help."

Buying gold, he explains, effectively means taking on exposure to both the gold price and to dollar movements relative to the rupee, since gold is internationally priced. In other words, gold functions as a de facto currency hedge and foreign investment vehicle for Indian households, even though it is not usually described that way. He adds that beyond the financial rationale, gold carries sentimental, emotional, and social value in Indian households, but underneath all of that, there is also a rational hedging instinct at work.

The cost of gold as the only diversification option

Sanjiv extends this point into a broader statistic: gold has become India's second-largest import after oil. He draws a sharp distinction between the two. Oil, he argues, is a commodity that gets consumed, whereas gold, in his view, is "really speaking... only investments." Indians are essentially sending thirty to forty billion dollars a year, he estimates, into a single global asset class, gold, when that same capital could instead be diversified across global equity markets.

"Why not allow that thirty, forty billion to in fact be invested in more growth assets rather than just pure gold. I think that's some policy question which the government should think about."

He is careful to frame this as a policy question rather than a definitive prescription, but his underlying argument is clear: forcing Indian savings into a single foreign asset class, gold, is not meaningfully better diversification than staying entirely within India. Indians are missing out on strong recent returns in markets like the AI-driven US Nasdaq, which he notes gave nearly sixty percent returns over the last two to three years, as well as strong performance in South Korea, Taiwan, and even Japan.

Why FIIs are leaving, and why market timing is unknowable

The conversation then turns to the flip side, foreign investors leaving India. Sanjiv is candid that predicting market direction is inherently uncertain, and he resists drawing simple conclusions from FII outflows. He notes that in hindsight, foreign investors who sold out when the rupee was at eighty-four or eighty-five look smart, since the rupee has since depreciated to ninety-five without Indian markets rising much. But he equally points out the opposite argument: with the rupee weaker and valuations not having risen, this could just as easily be viewed as an attractive entry point for foreign investors.

"One can never know how the markets function."

Rather than worrying about whether foreign capital will return, Sanjiv's focus shifts to what he sees as fixable structural problems, specifically, the frictions India has created that make it harder than necessary for foreign investors to participate, regardless of market timing.

Reducing friction: what India should fix for foreign investors

Sanjiv is direct about where he thinks Indian policy has gone wrong in attracting foreign capital. He points to the introduction of capital gains taxes on foreign investment that did not previously exist, changes to double taxation treaties depending on jurisdiction, and uncertainty around the approval process for becoming a Foreign Portfolio Investor (FPI). His concern is less about the specific tax rate and more about unpredictability: a foreign investor might plan around a ten percent tax rate only to find it has become twenty percent, or discover that the jurisdiction they invested through is no longer favorable.

"Don't make it tough for most of the foreigners to come in."

His proposed fix is to make the rules as simple and stable as possible, regardless of jurisdiction, whether investors come through GIFT City, Singapore, or Mauritius. He argues that once a foreign investor decides India is a good market, the system should let them act on that decision without added bureaucratic or tax-related friction. The core idea is that policymakers cannot control whether foreign investors like India at any given moment, but they can control how easy it is for those investors to act once they do.

Opening the two-way street: a policy vision for cross-border flows

Bringing his argument to a close, Sanjiv connects the two sides of the problem: Indians are restricted from freely investing abroad, and foreigners face friction investing into India. He argues that fixing both simultaneously, allowing Indians to invest more freely overseas while easing entry for foreign capital into India, would open up healthier two-way flows in the rupee-dollar market.

He suggests this would also reduce India's reliance on gold imports as a substitute for genuine diversification, since Indian savers would have direct access to global growth assets instead. While he acknowledges this could mean some capital flowing out of India into foreign equities, he believes this would ultimately be "much more healthier" than the current pattern of gold accumulation.

"Let foreigners come in... and Indians also invest outside... will allow opening up of the rupee-dollar market."

He frames this as one of the central policy questions India's regulators and government need to address going forward, not as a minor technical adjustment but as a structural fix to how Indian household savings and foreign capital interact with global markets.

Supplementary Resources

• India scraps tax on overseas bond investors in bid to attract foreign capital and shore up the rupee by Priyanka Salve (Resource)
• SEBI Increases Foreign Investment Limit For Mutual Funds To $1 Billion by Capital Market (Resource)
• Why India's high taxes are proving to be a buzz-kill for global investors by Catherine Bosley and Abhishek Vishnoi (Resource)
• India's Gold Story: Rising Imports, Household Demand, and RBI Reserves by Sai Krishna Muthyanolla (Resource)
• Policy information uncertainty and foreign institutional investors trading behavior: evidence from India by Chandra Thapa, Biwesh Neupane, Chaman Shrestha and Narayan Prasad Bhattarai (Journal article)

The complete transcript file is available to download below.