Redemptions from Indian equity mutual funds rose to an eight-month high in May with domestic investors pulling over $500 million from stocks as poor returns and a volatile market kept cautious investors at bay.
Investors withdrew 29.1 billion rupees ($509.86 million) from equity funds, while buying 209.19 billion rupees in debt funds in May, according to data released on Monday by the Association of Mutual Funds in India (AMFI).
The withdrawals came even as the NSE index rose 1.3 percent last month, boosted by hopes the Reserve Bank of India may cut interest rates for a fourth time this year in mid-June.
Retail investors, burned by the 2007-08 crash, have been heavy sellers of Indian stocks over the past three-and-a-half years, as risk-averse investors load up on debt and gold, creating a double-whammy for India's policymakers who have been trying to convince them to buy stocks.
The continued outflows are expected to further pressure margins in India's crowded and mostly unprofitable mutual fund industry, as debt funds attract lower fees than equity funds.
The government is keen to pry retail investors away from gold as imports of the yellow metal contribute to widening a current account deficit that hit a record high of 6.7 percent of gross domestic product in the October-December quarter.
Last week, India raised the import duty on gold to 8 percent from 6 percent, after extending a ban on consignment imports to government-run agencies and trading houses from banks, as part of a series of measures to contain the record current account deficit.
Domestic institutional investors have pulled 480.39 billion rupees from India's stock markets since the beginning of this year, while foreign investors have loaded up on shares, buying 570.78 billion rupees worth of stocks during the same period.