Navigating the Contradiction: Why Mutual Funds Are Buying These 55%-Off Nifty 500 Stocks 

Navigating the Contradiction: Why Mutual Funds Are Buying These 55%-Off Nifty 500 Stocks 

The recent sharp declines in several well-known Nifty 500 stocks present a classic investor dilemma. On one side, you have sobering price drops of 40% to 55% from their 52-week highs. On the other, you have sophisticated institutional investors—domestic mutual funds—doing the exact opposite of panicking. Over the past three quarters, they have steadily increased their holdings in many of these same battered stocks. This conflicting signal—a sea of red on investor dashboards but consistent buying from the “smart money”—forces a critical question: Is this a rare opportunity or a trap? 

The Contradiction: Steep Falls vs. Rising Conviction 

A closer look at the data reveals a fascinating pattern. While the broader market has seen volatility, mutual funds have been net buyers, increasing holdings in 147 Nifty 500 stocks over the last three quarters. Yet, within this group, a subset has suffered dramatic losses. The table below highlights the stark contrast for the eight biggest decliners. 

This data forms the core of the puzzle. It’s not just a case of funds holding on; it’s a clear trend of accumulation on weakness. This behavior diverges sharply from the actions of another major player: foreign portfolio investors (FPIs), who have been significant net sellers in 2025, reducing their ownership of Indian equities to a 15-year low. This has created a unique market dynamic where domestic institutions are providing a counterbalance to foreign outflows. 

Decoding the Institutional Mindset: Four Potential Explanations 

Why would professional money managers double down on falling stocks? Their actions are not impulsive but stem from a research-intensive process. Understanding their potential rationale is key for any individual investor evaluating the same opportunity. 

• A Different Time Horizon: For a retail investor, a 50% drop over months is alarming. For a mutual fund with a multi-year, full-market-cycle view, it may represent an expected but temporary dip in a long-term growth story. They can afford to look past quarterly volatility if the structural thesis remains intact. 

• Valuation Reset Creating Entry Points: Many of these stocks, like FirstCry and Newgen Software, had reached elevated valuations during their bull runs. A sharp correction, even if driven by broader market sentiment or sectoral rotation, can bring prices back to a zone that long-term models identify as attractive. The fund is not necessarily “catching a falling knife” but may be executing a planned entry at a target price level. 

• Fundamental Resilience Amidst Noise: The stock price might be falling due to macroeconomic fears or negative sector sentiment, but the company’s underlying business—its order book, market share, margin profile, or management execution—could be holding up or even improving. Funds with deep research capabilities are positioned to spot this disconnect between price and business reality. 

• Portfolio Rebalancing and Scale: A large fund managing thousands of crores isn’t buying a stock in isolation. Its purchase could be part of a strategic sector overweight or a rebalancing act within a much larger portfolio. What looks like conviction in a single falling stock might be a calculated risk within a diversified basket. 

The Other Side of the Coin: When the “Smart Money” Could Be Wrong 

Blindly following institutional activity is a perilous strategy. History is replete with examples of collective misjudgment. It’s crucial to consider the counter-arguments. 

• The Herd Mentality Trap: The “mutual fund backing” itself can be a misleading signal if multiple funds are simply following each other into a popular narrative that later proves flawed. Their increasing holdings could reflect momentum within their own industry rather than independent analysis. 

• Being Early vs. Being Wrong: A famous Wall Street adage warns that “the market can remain irrational longer than you can remain solvent.” A fund might be correct on a company’s five-year potential but painfully early in its timing. For an individual investor without the same capital cushion, this can be financially and emotionally draining. 

• Structural Shifts and Broken Theses: Sometimes, a steep fall is not a correction but a repricing due to a fundamental rupture. A change in regulatory policy, a disruptive new competitor, or a permanent shift in consumer behavior (potentially relevant for some listed consumer-facing firms) can break the original investment thesis. A fund might be averaging down into a value trap. 

A Framework for Your Decision: Key Questions to Ask 

Before deciding to be “in or out,” use the mutual fund activity not as an answer, but as a starting point for your own rigorous analysis. Ask these critical questions: 

• What is the Reason for the Fall? Distinguish between company-specific issues (poor earnings, governance concerns, losing a major contract) and external factors (sector-wide de-rating, rising input costs, FPI selling pressure). The latter often presents better opportunities for a rebound if the company is robust. 

• Have the Fundamentals Deteriorated? Go beyond the headline stock price. Scrutinize the last few quarterly statements for trends in revenue growth, profit margins, debt levels, and cash flow. Is the business model impaired, or is it weathering a storm? 

• What is the Updated Valuation? A stock down 50% is not automatically cheap. Calculate key metrics like Price-to-Earnings (P/E) or Price-to-Book (P/B) relative to its own historical range and its industry peers. The decline must be matched by a compelling valuation argument. 

• What is Your Own Investment Horizon and Risk Tolerance? This is the most personal and vital question. Are you prepared to hold—and potentially watch the stock fall further—for two to three years to allow a recovery thesis to play out? If the volatility will cause you to sell in panic, this type of investment is not suitable for you. 

Building a Disciplined Approach 

Navigating such markets underscores the importance of a disciplined portfolio strategy. Leading institutional advisors emphasize moving beyond simple asset allocation to a “total portfolio approach,” where every investment must compete for capital based on its risk-return contribution. In an environment where traditional diversification benefits may be shifting, considering strategic exposures to assets with uncorrelated returns can help manage overall risk. 

For the equity portion, this might mean not chasing concentrated bets but building a portfolio of high-conviction ideas from varied sources, ensuring diversification across sectors and market capitalizations. This approach can be particularly valuable when a segment of the market, like the mid- and small-caps where retail ownership is rising, experiences heightened volatility. 

Conclusion: Beyond the Binary of “In or Out” 

The sight of mutual funds buying stocks that have crashed 55% is a powerful narrative, but it is not an investment strategy. It is a data point that demands context. For the disciplined, long-term investor, these situations are not about finding a quick tip but about doing the hard work of analysis. They represent a moment to assess whether a quality business is on sale due to transient fears or if it is fundamentally broken. 

The ultimate decision hinges on aligning an objective assessment of the company with your personal financial goals. In today’s complex market, characterized by shifting global capital flows and evolving economic relationships, success often belongs to those who can synthesize information—like contradictory buying and selling patterns—into independent, well-researched conviction. The real question isn’t whether the mutual funds are in or out; it’s whether, after your thorough investigation, you have a clear and reasoned basis to be in or out yourself.