Investor Behavior and Industry Challenges in Indian Mutual Funds: A Comprehensive Analytical Approach

Abstract

This study conducts a multifaceted exploration of investor behavior and industry challenges within the Indian mutual fund ecosystem, employing a comprehensive analytical framework. On the behavioral front, we examine demographic influences such as age, education, and risk appetite on investment decision-making, replicating survey-based methodologies that highlight the roles of financial literacy, peer advice, and emotional biases. The analysis further delves into prevalent behavioral phenomena in Indian investors, including herding, FOMO-driven inflows into mid- and small-cap funds, trend-chasing withdrawals from low-risk schemes, and portfolio rebalancing towards gold and alternatives. On the industry challenges side, the paper assesses structural issues such as incomplete market penetration due to low retail participation and limited financial awareness ; technological barriers in reaching first-time investors; and systemic risks accentuated by episodes like credit crises in NBFC-backed debt funds (e.g., IL&FS, DHFL) that have undermined liquidity and investor confidence. Additionally, regulatory scrutiny and governance tensions such as SEBI’s response to style drift, scheme fragmentation, and closure of certain fund categories are evaluated for their impact on fund transparency and trust.
The study uses a mixed-methods approach, integrating quantitative survey data with secondary data analysis of net flows, SIP trends, and AUM growth. It also presents case-based evaluations of institutional regulations and investor protection frameworks. Evidence includes record-high SIP inflows exceeding ₹27,000 cr in June 2025, alongside a wave of SIP terminations and shifts towards alternative assets. These dynamics underscore evolving investor preferences and the adaptive strategies of fund houses. The research advances a holistic model linking investor psychology with institutional and regulatory structures. It recommends targeted financial education programs, enhanced digital engagement strategies, and tighter governance practices to improve retail inclusion, safeguard liquidity, and nurture sustainable industry growth. The findings benefit academics, policymakers, asset managers, and regulators aiming to foster a resilient, investor-centric mutual fund market in India.