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Archive / Mutual Fund Distributors / Concept & Role of a Mutual Fund
nism-series-va-mutual-funds-market-stabilizer-fpi-selloff[ MUTUAL FUND DISTRIBUTORS ]

How did the Indian mutual fund industry demonstrate its role as a key market stabilizer during periods of significant foreign institutional selling in 2022 and 2025?

[ A ]By borrowing directly from the World Bank to purchase distressed corporate bonds
[ B ]By mandating that all retail investors freeze their demat accounts during market declines
[ C ]By converting all open-ended equity schemes into guaranteed fixed return debt products
[ D ]By absorbing heavy Foreign Portfolio Investor (FPI) equity sell-offs through robust domestic retail inflows and systematic investment plans (SIPs)[ CORRECT ]
Takeaway

Option D is correct: By absorbing heavy Foreign Portfolio Investor (FPI) equity sell-offs through robust domestic retail inflows and systematic investment plans (SIPs)

Derivation
Mutual funds act as crucial domestic market stabilizers. During volatile periods such as 2022 and 2025 when Foreign Portfolio Investors (FPIs) engaged in heavy net selling, consistent domestic retail inflows—largely driven by disciplined monthly SIP contributions—provided substantial counter-cyclical buying support, preventing market disruptions. This question tests the macro-economic and capital market role of mutual funds. A common error is assuming market stabilization involves state-directed bailouts or regulatory account freezes.
Why the others fail
A — By borrowing directly from the World Bank to purchase distressed corporate bonds
Mutual funds cannot borrow from international agencies to buy assets; borrowing is strictly limited to 6-month short-term liquidity needs.
B — By mandating that all retail investors freeze their demat accounts during market declines
Mutual funds and statutory market regulators do not arbitrarily freeze investor accounts during regular market volatility cycles.
C — By converting all open-ended equity schemes into guaranteed fixed return debt products
Mutual funds are pass-through entities and cannot convert equity schemes into guaranteed debt products during market downturns.