(C) Investment Week

SEOUL — South Korean equity funds delivered a stellar performance in 2025, significantly outperforming overseas funds as the domestic stock market experienced an unprecedented rally.

Five-Fold Outperformance Driven by KOSPI Surge
According to data from FnGuide on January 4, 1,053 domestic equity funds recorded an average return of 81.53% last year. This far exceeded the 17.04% average return of 1,154 overseas equity funds during the same period. Index funds, in particular, saw returns reach as high as 84.72%, tracking the robust momentum of the broader market.

The primary driver was the KOSPI’s meteoric rise of 75.63%, the highest among major global indices. Market analysts attributed this growth to strong earnings from big tech companies, progress in U.S.-China trade negotiations, high expectations for new government policies, and the tangible benefits of the AI boom.

Capital Flows vs. Explosive Liquidity
Despite the superior returns of domestic funds, more capital flowed into overseas funds (15.8 trillion KRW) than domestic ones (13.3 trillion KRW). This suggests that South Korean investors' preference for global assets remains firm. Domestic investors net-purchased approximately $32.46 billion in U.S. stocks, with the total valuation of U.S. stock holdings reaching $163.58 billion.

However, the surge in "sidelined" capital was notable. Investor deposits jumped from 54.2 trillion KRW at the end of 2024 to 87.4 trillion KRW by the end of 2025. Along with a rise in margin debt, this indicates that liquidity in the financial system has reached record levels, setting the stage for continued market activity in 2026.