The contraction came despite a surprise resilience in equity inflows, which stood at ₹40,450 crore during the month, even as markets remained volatile amid the ongoing West Asia conflict. Domestic investors continued to deploy fresh money into flexi-cap, mid-cap and small-cap funds.

On a year-on-year basis, the industry's net AUM rose 12.15 per cent from ₹65.74 lakh crore in March 2025.

Within equity schemes, flexi-cap funds led inflows with ₹10,054.12 crore, while mid-cap and small-cap funds each attracted over ₹6,000 crore. In contrast, arbitrage funds witnessed outflows of ₹21,113.70 crore, while debt mutual funds saw a sharp redemption of ₹2.94 lakh crore, largely due to quarter-end treasury adjustments and profit booking by institutional investors.

Flows into gold exchange-traded funds (ETFs) moderated to ₹2,265.68 crore from ₹5,254 crore in February, while silver ETFs recorded outflows of ₹683 crore. Systematic investment plan (SIP) inflows remained robust at ₹32,087 crore in March, up from ₹29,845 crore in February.

"March data reflects a clear shift in investor behaviour compared to February, indicating tactical relocation rather than sentiment-driven exit," said Kartik Jain, managing director and CEO, Shriram AMC.

Nitin Agrawal, CEO, Mutual Funds at InCred Money, said the AUM decline was largely mark-to-market in nature, driven by the sharp correction in equities, rather than any erosion of investor confidence. .

Suranjana Borthakur, head of distribution and strategic alliances at Mirae Asset, noted that March reflected divergent trends. "Total equity flows jumped with flexi cap alone hitting its highest ever single month print. Inflows into small and midcap funds surged confirming investors are treating every correction in the space as buying opportunity. On the flipside, hybrid fund flows swung sharply negative," she said.

Venkat Chalasani, chief executive of Amfi, said: "SIP contributions remained strong, with nearly 9.72 crore contributing accounts, underlining the growing preference for disciplined, systematic investing."

Ankur Punj, managing director at Equirus Wealth, said March typically sees elevated outflows. "This is a temporary phenomenon, and inflows are expected to pick up in the coming months," he added.