Through the year, FII inflows were positive in almost all months except May. That's when domestic mutual funds bought hard. During the rest of the year, they were mostly selling -- barring the odd month or two.

If equity funds are a proxy for retail investors, it would appear as if most retail investors sat on the sidelines -- or chose to book profits well ahead of the market peaks.

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Nishid Shah, chief information officer (equity), Birla Sun Life Mutual Fund, agrees that 2004 saw a net outflow from mutual funds, but says the trend may now be reversing.

"Though there has been a net outflow from domestic funds, the participation of retail and high net worth investors is on the rise, driven by attractive tax benefits and the fact that equity is a good hedge against inflation," says Shah.

Nikhil Johri, chief operating officer, ABN Amro Mutual Fund, says retail participation is coming in primarily through new issues and portfolio management schemes.

Having been scarred by the 1992, 1994 and 2000 asset bubbles, most retail investors probably decided discretion was the better part of valour.

Amit Rathi, managing director, Anand Rathi Securities, says many domestic investors bailed out well before the Sensex hit the 6,000 mark.

"The rally over the last five-six weeks has been driven largely by the FIIs," says Rathi. "Domestically, we have seen a fair bit of profit-booking, right from Sensex 5,800 plus levels." This suggests that those who came to the Sensex party this time left early.

But they didn't leave empty-handed. According to Gurunath Mudlapur, head of research at Khandwala Securities, the churn in domestic funds tells its own story.

"As domestic funds understand the risk-reward expectations of Indian investors better and since they have been fortunate to own a lot of cheaply acquired blue-chip assets, they have exploited trading opportunities in the domestic markets (when the FIIs were active)," explains Mudlapur. Mutual fund investors would thus have reaped some reward as the Sensex went skywards.

However, what will happen if the mood reverses? Will domestic buyers be able to buy when the FIIs want to sell to prevent a complete rout in the market? Ajay Bagga of Kotak Mutual Fund believes the domestic market for equity is steadily expanding.

"The market is deepening in terms of market capitalisation, with large, new companies, especially in the public sector, getting listed and new institutional players emerging," says Bagga.

The entry of new FIIs and domestic insurance companies with a long-term investment horizon, and the impending entry of pension funds will additionally increase the market share and volumes of institutional players in the domestic market.

Says Johri: "The introduction of quality companies in the market place is creating its own demand. We believe the domestic market should be able to absorb FII selling as and when it happens."

Not everybody is so sanguine, though. Sharad Shukla, head of investment advisory services at IL&FS Investmart, says that since a good part of the FII inflow is hot money, "any unforeseen circumstance may completely reverse the direction of these flows".

Among things the hot money merchants will be keeping a hawkish eye on are: delays in important reforms, including those in infrastructure, and an expansion of the fiscal deficit to unsustainable levels.

The use of capital by companies can be efficient only with an improvement in infrastructure. And high fiscal deficits have negative implications for inflation and interest rates.

Not that the FIIs are planning any hasty exit for now. Says Amit Rathi: "We don't believe that on an aggregate basis you will see FIIs exiting because of the lack of alternatives. But I believe sustained stability in the markets could see a meaningful shift of domestic household savings into equities."

Rathi points out that last year equity accounted for a piffling 1.5 per cent of the gross financial assets of the household sector. Given this underinvestment, even a 1 per cent shift in the stock of household savings to equity "would make the Indian investor a more powerful force than the FIIs".

According to the Reserve Bank of India's annual report for 2003-04, the household sector's investment in shares and debentures has actually fallen from 4.1 per cent in 2000-01 of its total investment in financial assets to 1.4 per cent in 2003-04. The moot point, though, is how long will the Indian investor take to shed his risk-aversion.