Over the past week the Indian stock market has fallen close to 6 percent as foreign institutions have sold shares worth about $362 million. Indian institutions, however, have bought shares worth $265 million, according to newspaper reports, showing their commitment to staying invested for the long run.
One of India's top bankers warned in an interview to a local newspaper in January that the earlier surge in stock prices posed the risk of a "bubble" as a lot of domestic savings entered the market.
For its part, market watchdog Securities and Exchange Board of India warned against over-selling the advantages of investing in the stock market through mutual funds.
According to media reports, it asked AMFI to tone down its advertising campaign.
"SEBI was just playing the devil's advocate. They just want us to make people aware that market volatility can happen. As an industry player, I shouldn't go overboard," AMFI's Balasubramanian told CNBC.
According to mutual fund researcher Bala, the rise in retail investments is making Indian markets less dependent on foreign "hot money" — short-term bets originating from other countries — but it is too early to say whether or not new Indian investors "are here for the long run." She pointed out that many have not yet "tasted volatility."
"It is very important to set their expectations right — that the current return on equities may not last," Bala said.
Still, Awasthi said the situation doesn't look like a bubble given India's growth story.
"Seventy percent of India's population is under 30 years of age. They will get jobs, spend on cars and houses and boost corporate earnings," he said, pointing to India's gross domestic product growth of 7 percent, making it one of the world's fastest growing economies.
Awasthi added that investors are putting money into the equity market mainly through systematic investment plans, which allow regular small amounts to be invested instead of one-time lump sums. Such equity plans today stand at over $900 million, the highest ever, according to Karvy data.
"This constitutes sticky money and will provide a cushion against [foreign institutional investor] outflows," Awasthi said.