Whalesbook
Market Turbulence Defined 2025 for Indian Mutual Funds
Mutual fund investors in India faced a significantly challenging year in 2025. After strong performances in prior years, equity markets struggled through much of 2025. Global trade tensions, consistent selling by foreign investors, and high valuations created headwinds. These factors culminated in a period that tested the patience of many investors.
Economic Headwinds and Market Corrections
Fresh tariff hikes and protectionist policies from the US impacted export-oriented sectors notably between February and April 2025. Uncertainty surrounding US interest rate decisions, fluctuating crude oil prices, and ongoing geopolitical tensions kept overall risk appetite subdued during the first half of the year. A sharp correction observed in mid- and small-cap stocks during March–April, where many saw declines of 30–45% from their peaks, further amplified investor discomfort.
Performance Across Fund Categories
The market volatility was clearly reflected in mutual fund returns. Large-cap funds managed to deliver approximately 7.92% year-to-date (YTD). However, popular equity categories such as flexi-cap, ELSS, multi-cap, and large & mid-cap funds hovered in the 1–3% range. Mid-cap funds saw a marginal rise of 2.10%, while small-cap funds experienced a decline of 6.39% YTD, making 2025 a difficult year for those seeking high-growth themes. Even thematic and sectoral funds, which had previously delivered stellar returns, struggled, with infrastructure, PSU, technology, and consumption themes remaining flat or negative for most of the year. Only select pockets, including international equity funds and certain banking and auto-focused funds, performed relatively better.
Investor Resilience Amidst Volatility
Despite the disappointing equity returns, investor behavior showcased remarkable resilience, particularly through Systematic Investment Plans (SIPs). SIP inflows remained strong throughout the year, touching ₹29,445 crore in November 2025, an increase of 16.3% year-on-year from ₹25,320 crore in November 2024. The SIP Assets Under Management (AUM) also grew to around ₹16.53 lakh crore, representing over 20% of the industry’s total AUM. This steady domestic commitment provided a crucial cushion to the markets, even as foreign institutional investors (FIIs) remained net sellers for much of the year.
Rise of Multi-Asset and Precious Metals
Among mutual fund categories, multi-asset allocation funds emerged as significant outperformers, delivering around 15.14% YTD returns. Their success was largely attributed to their exposure to precious metals. Gold funds provided YTD returns of 71.56%, while silver funds surged by 120%. This performance was supported by central bank buying and robust industrial demand, helping to diversify returns and lift overall portfolio performance in a year where equity returns were generally sub-par.
Lessons Learned and 2026 Outlook
Deepak Jain, President & Head–Sales at Edelweiss MF, highlighted that equity returns are not linear and short-term performance should not dictate long-term expectations. He stressed the importance of diversification in managing volatility. Rajani Tandale, Senior Vice President – Mutual Fund at 1 Finance, advised against retail investors attempting to act as their own fund managers by selectively buying volatile segments, suggesting professional fund managers are better equipped. She also emphasized personalized financial advice for overall asset allocation.
Looking ahead to 2026, experts anticipate a more constructive footing. Expectations of gradual Federal Reserve easing, easing trade tensions, and benign energy prices are improving the global macro backdrop. Neelesh Surana, Chief Investment Officer at Mirae Asset Investment Managers (India), believes India enters 2026 with a stronger setup, supported by robust macros and expected GDP growth above 7%. He anticipates a revival in corporate earnings growth to a double-digit trajectory post a muted FY26.
Rajani Tandale suggests that large-cap and flexi-cap funds appear better positioned for 2026 due to their flexibility in adapting to market conditions. While optimism is returning, experts urge investors to temper expectations. Deepak Jain recommends aiming for portfolio returns approximately 5–6% higher than the risk-free rate. Swapnil Aggarwal, Director at VSRK Capital, emphasizes discipline, stating that asset allocation matters more than market timing, with realistic equity return expectations between 10–13%.
Impact
This news provides critical insights into the performance of Indian mutual funds and equity markets during a turbulent year, offering valuable lessons and strategic guidance for investors. It highlights the importance of diversification, SIP discipline, and realistic return expectations for navigating market volatility. The outlook for 2026 suggests a cautious optimism, focusing on potential earnings recovery and the strategic advantage of certain fund categories. The analysis directly influences investor sentiment, asset allocation strategies, and overall portfolio construction decisions for the Indian market.
Impact Rating: 8/10
Difficult Terms Explained
- Mid-cap stocks: Stocks of companies with medium market capitalization, generally falling between small-cap and large-cap companies.
- Small-cap stocks: Stocks of companies with small market capitalization, often associated with higher growth potential but also higher risk.
- Flexi-cap funds: Mutual funds that have the flexibility to invest across the market capitalization spectrum—large, mid, and small-cap stocks—without any specific restrictions.
- ELSS (Equity Linked Savings Scheme): Tax-saving mutual funds that invest primarily in equity and equity-related instruments.
- Multi-cap funds: Mutual funds that invest in a minimum of 25% each in large-cap, mid-cap, and small-cap stocks.
- Large & Mid-cap funds: Mutual funds that are mandated to invest at least 35% each in large-cap and mid-cap stocks.
- Thematic funds: Mutual funds that invest in companies belonging to a specific theme or sector, such as technology, infrastructure, or consumption.
- Sectoral funds: Mutual funds that invest exclusively in companies within a particular sector of the economy.
- International equity funds: Mutual funds that invest in stocks of companies listed on stock exchanges outside the investor's home country.
- Multi-asset allocation funds: Mutual funds that invest in at least three different asset classes, such as equities, debt, gold, or real estate.
- SIP (Systematic Investment Plan): A disciplined investment approach where investors invest a fixed amount of money at regular intervals (e.g., monthly) in a mutual fund scheme.
- AUM (Assets Under Management): The total market value of the assets managed by a mutual fund or investment company.
- FII (Foreign Institutional Investor): An entity, such as a mutual fund or pension fund, based outside India that invests in Indian securities.
- YTD (Year-to-Date): The period from the beginning of the current calendar year up to the present date.
- RBI (Reserve Bank of India): India's central banking institution responsible for monetary policy and regulation of the banking system.
- Basis Points: A unit equal to 1/100th of a percentage point. 100 basis points equal 1%.
- Money Market Curve: A graphical representation of the yields of short-term debt instruments with similar credit quality but different maturities.
- Corporate Bonds: Debt securities issued by corporations to raise capital.
- Accruals: Income that has been earned but not yet received or paid.
- Yield Curve Flattening: A situation where the spread between long-term and short-term interest rates decreases, meaning long-term rates are rising slower than short-term rates, or falling faster.
- ETFs (Exchange-Traded Funds): Investment funds traded on stock exchanges, typically holding a portfolio of assets like stocks or bonds.
- Drawdown Risk: The risk of a significant temporary decline in the value of an investment from its peak.
- GDP (Gross Domestic Product): The total monetary or market value of all the finished goods and services produced within a country's borders in a specific time period.