The mutual fund (MF) industry’s penetration journey has broadly continued, but weak equity market returns have begun to weigh on its expansion beyond the cities. The semi-urban and rural areas — those outside a pre-defined set of 112 cities — added just 1.3 million new investors in financial year (FY) 2026, sharply down from 6.1 million in FY 2025.
The MF investor base from these locations, which account for over half of the total PANs registered with MFs, grew by just 3.8 per cent last year. The total number of unique investors from these locations stood at 33.9 million at the end of March 2026, up from 32.6 million in March 2025, data released by the Securities and Exchange Board of India (Sebi) in its annual report shows. In FY 2025, the investor count from these areas had grown 23 per cent.
While the MF industry divides markets into T-30 (the top 30 cities) and B-30 (locations beyond T-30), Sebi uses a three-tier classification. Tier I comprises the eight metropolitan cities — Ahmedabad, Bengaluru, Chennai, Delhi, Hyderabad, Kolkata, Mumbai and Pune. The next 104 large cities, including Agra, Amritsar, Bhiwandi, Bhubaneswar and Jamshedpur, are classified as Tier II, while the remaining areas fall under Tier III.
MFs’ unique investor base is the number of PANs registered with fund houses.
While the Tier III locations witnessed an expected slowdown, a completely different script played out in Tier II cities. These areas, which have been at the centre of the financialisation of savings, added more than double the number of investors in FY 2026 compared to FY 2025. The industry added 3.9 million investors from Tier II last year, compared to 1.8 million in FY 2025.
According to MF officials and distributors, while the ongoing financialisation of savings continues to play out in Tier II, the sharp slowdown in Tier III reflects both higher investor exits amid equity market volatility and fewer new investors coming in as returns became less attractive than they were until 2024.
“A large part of the Tier III investor base came in during a strong market cycle, often driven by momentum rather than advice. Ticket sizes are smaller and this has been their first real experience of a correction,” said Manish Kothari, co-founder and chief executive of ZFunds.
Aditya Agarwal, co-founder of Wealthy.in, also shared a similar reason. “In many Tier III markets, investors entered MFs without the same level of guidance and are now struggling to invest because they haven’t been coached about how tough times are part of the journey.”
They also attributed the slowdown to a higher investor base. “Tier III had reached a base of nearly 33.9 million investors which is more than double of Tier I, II. Maintaining a high percentage growth rate on such a large base becomes mathematically difficult without sustained organic expansion,” said Vaibhav Chugh, CEO, Abakkus Mutual Fund.
“On the other hand, select Tier II cities have seen rapid job creation, formal salary growth, and an influx of corporate operations. Coupled with the fact that these investors possess higher average household incomes than Tier III; providing the disposable money required to commit to recurring SIPs or lumpsum investments,” he added.
