The last one year has been a tough test for most equity fund categories. Markets remained volatile, and several equity sub-categories struggled to deliver meaningful returns. Despite challenges, there were quite a few equity mutual funds that managed to surprise investors by delivering over 20% returns in the last one year.
What makes this performance stand out is that these winners were not diversified funds but sectoral and thematic schemes, largely focused on banking & financial services and auto and transportation. Their strong showing highlights how select sectors continued to find favour even when the broader market remained under pressure. This was an important lesson for investors on where market leadership lay during a difficult year.
Why these sectors did well
If we analyse equity sub-categories over the last one year, banking & financial services emerged as the best-performing domestic sector with returns of around 21%, followed by auto and transportation at nearly 18%. Only the international equity category, which clocked close to 33% returns, managed to do better than these two.
Beyond these, performance was far more muted. Among equity sub-categories, only two sectoral (banking and auto) and two thematic (energy and PSU) segments managed to deliver double-digit returns in the last year. Most other key equity categories were stuck in single-digit territory.
Large-cap funds, despite their relative stability, returned just 9.38%, making them the best among diversified equity categories. Flexi-cap, ELSS and mid-cap funds delivered less than 5% returns, while small-cap funds remained under pressure, still down nearly 5% over one year. The Nifty Smallcap 250 index itself is down over 7%, highlighting how tough 2025 was for smaller companies.
Top equity funds that delivered over 20% returns in 1 year
Quant BFSI Fund – Direct Plan – Growth: 27.14%
DSP Banking & Financial Services Fund – Direct Plan: 25.47%
HDFC Transportation and Logistics Fund – Direct Plan: 24.87%
ITI Banking and Financial Services Fund – Direct Plan: 24.31%
SBI Banking & Financial Services Fund – Direct Plan: 23.80%
A quick look at these numbers shows a clear trend—banking and financial services dominated performance charts, while auto-linked stocks also delivered strong gains.
How these top-performing funds achieved their returns
Quant BFSI Fund – Direct Plan
The top performer benefited from an aggressive and high-conviction approach within the financial sector.
Its portfolio leans towards insurers and NBFCs alongside banks, with holdings such as life insurance companies, housing finance players and select lenders.
This concentrated strategy helped the fund capture sharp upswings in financial stocks, but it also makes returns more volatile.
DSP Banking & Financial Services Fund – Direct Plan
The fund followed a more balanced route. Its portfolio is anchored around large, well-established banks such as private sector leaders and PSU banks, complemented by exposure to insurance and market infrastructure companies.
This relatively quality-focused approach allowed it to deliver strong gains without taking extreme portfolio risks.
HDFC Transportation and Logistics Fund – Direct Plan
It stood out as the only non-BFSI fund on the list. Its performance was driven largely by automobile and auto ancillary stocks. Heavyweights from passenger vehicles, two-wheelers and auto components dominated its portfolio, helping the fund benefit from steady demand, premiumisation trends and improving margins in the auto sector.
ITI Banking and Financial Services Fund – Direct Plan
The scheme relied on a bank-heavy strategy, with large allocations to private and public sector banks. While relatively conservative compared to some peers, the strong rally in frontline banking stocks helped it generate above-20% returns in a year.
SBI Banking & Financial Services Fund – Direct Plan
It is one of the oldest funds in this space, leveraging its diversified exposure across private banks, PSU banks, insurance companies and NBFCs. Its scale and long track record allowed it to capture the sector’s overall uptrend effectively.
Why sectoral and thematic funds can shine in tough markets
Sectoral and thematic funds tend to do well when market leadership is narrow—as was the case over the last year. Instead of spreading money across many sectors, these funds focus on areas that are benefiting from specific economic or policy trends, such as credit growth, interest rate cycles, infrastructure spending or consumption recovery.
Key advantages include:
Ability to capture sharp rallies in specific sectors
Higher return potential during favourable sector cycles
Clear and transparent investment theme
But risks are equally high
The flip side is that sectoral and thematic funds come with very high risk. Their performance is closely tied to the fortunes of just one or two sectors. If the cycle turns, returns can fall sharply and for prolonged periods.
Key risks include:
High volatility and sharp drawdowns
Poor performance during unfavourable sector cycles
Lack of diversification compared to multi-cap or flexi-cap funds
A word of caution on past returns
While the last one year’s returns look impressive, investors should remember that past performance is not a guarantee of future returns. Sector leadership keeps changing. What worked in the last year may underperform in the next.
Sectoral and thematic funds are best suited for experienced investors who understand market cycles and are willing to take tactical exposure. For most long-term investors, these funds should ideally form only a small satellite portion of the portfolio, with the core allocation remaining in diversified equity funds.
In short, these funds proved that even in a difficult market, focused bets can deliver strong results—but only if investors are prepared for the risks that come with them.
Disclaimer: The above content is for informational purposes only. Mutual Fund investments are subject to market risks. Please consult your financial advisor before investing.