For mutual fund investors, 2025 turned out to be a year that tested their patience. After a strong run in previous years, equity markets struggled for a better part of the year amid global trade tensions, persistent foreign investor selling and high valuations.
Fresh US tariff hikes and protectionist measures hurt export-oriented sectors between February and April 2025. Uncertainty over US rate cuts, crude oil prices and geopolitical tensions kept risk appetite subdued through the first half of the year. The sharp correction in mid and smallcap stocks during March–April, with several stocks falling 30–45% from their peaks, added to investor discomfort.
This volatility clearly reflected in mutual funds turns. While large-cap funds managed to deliver about 7.92% YTD, most popular equity categories such as flexi-cap, ELSS, multi-cap and large & mid-cap funds were stuck in the 1–3% range. Mid-cap funds rose marginally by 2.10%, while small-cap funds fell 6.39% YTD, making 2025 a difficult year for investors chasing high-growth themes.
Even thematic and sectoral funds that had delivered stellar returns earlier struggled. Infrastructure, PSU, technology and consumption themes remained flat or negative for most of the year. Only select pockets such as international equity funds and certain banking and auto-focused funds fared relatively better.
2025’s biggest lesson: Equity returns are not linear
Market volatility in 2025 reinforced a fundamental truth of equity investing — returns do not move in straight lines.
According to Deepak Jain, President & Head–Sales, Edelweiss MF, investors need to recalibrate expectations.
“The key takeaway from 2025 is that equity returns are not linear. Short-term performance cannot be extrapolated into long-term expectations, as doing so often leads to disappointment.”
Jain also underlined the importance of diversification during uncertain phases. “Another important lesson is the role of diversification—spreading investments across assets helps manage volatility and protects portfolios during uncertain phases.”
This view resonated across experts, especially after mid- and small-cap corrections exposed the risks of concentrated bets.
Don’t try to be your own fund manager
For retail investors, 2025 also highlighted the pitfalls of tactical market-cap selection. Rajani Tandale, Senior Vice President – Mutual Fund at 1 Finance, cautioned against isolated exposure to volatile segments. “From an implementation perspective, investors should avoid trying to become their own fund managers by selectively buying mid- or small-cap schemes in isolation.”
She added that professional fund managers are better placed to handle market-cap allocation. “Equity market-cap allocation is better handled by professional fund managers, particularly through flexi-cap/ Index funds strategies.”
On overall portfolio construction, Tandale believes personalised advice matters more than product-led allocation. “For overall asset allocation, investors are better off taking personalised advice from a financial advisor, rather than relying on expensive, one-size-fits-all multi-asset funds.”
Despite volatility, SIP discipline stayed strong
Even as equity returns disappointed, investor behaviour told a different story. Systematic Investment Plan (SIP) inflows remained resilient throughout the year. In November 2025, SIP inflows touched Rs 29,445 crore, up 16.3% year-on-year from Rs 25,320 crore in November 2024.
SIP AUM rose to around Rs 16.53 lakh crore, accounting for over 20% of the industry’s total AUM, reflecting steady investor commitment despite rising stoppage ratios.
According to Prateek Nigudkar, Senior Fund Manager, Shriram AMC, domestic flows played a stabilising role even as foreign investors remained net sellers. “Foreign institutional investors (FIIs) were net sellers for much of the year but at the same time, retail participation via SIPs held up well, providing a steady domestic cushion to the markets.”
Nigudkar noted that while benchmarks touched fresh highs at points, market performance remained uneven across sectors and market caps.
Why multi-asset strategies stood out in 2025
Among all mutual fund categories, multi-asset allocation funds emerged as clear winners, delivering around 15.14% YTD returns. Their success was driven largely by exposure to precious metals.
Gold funds delivered 71.56% YTD returns, while silver funds surged 120%, supported by central bank buying and strong industrial demand.
Nigudkar explained how this helped diversify portfolios. “Multi-asset portfolios benefited materially from the precious-metals rally that saw Gold and Silver reach multi-year highs, helping diversify returns and lift performance of multi-asset funds in a year where equity returns were generally sub-par.”
Entering 2026: cautious optimism builds
Looking ahead, experts see 2026 starting on a more constructive footing. Expectations of gradual Fed easing, easing trade tensions and benign energy prices are improving the global macro backdrop.
Neelesh Surana, Chief Investment Officer, Mirae Asset Investment Managers (India), believes India enters 2026 with a stronger setup. “India enters 2026 with a stronger equity market setup, supported by robust macros, pro-growth fiscal and monetary measures, and GDP growth expected to remain above 7% —setting the stage for a potential earnings recovery.”
Surana expects earnings growth to revive after a muted phase. “We remain constructive, as earnings growth is likely to return to a double-digit trajectory post a muted FY26, driven by improving demand, tax cuts, and monetary easing.”
He also highlighted opportunities beyond large caps. “The growing presence of high-quality, sector-leading companies within the mid and small-cap space makes a strong case for meaningful allocation.”
Large-cap and flexi-cap funds in focus for 2026
While optimism is returning, experts advise selectivity. Rajani Tandale believes large-cap and flexi-cap funds are better positioned.
“As we enter 2026, large-cap and flexi-cap funds appear better positioned, as fund managers have the flexibility to dynamically shift across market caps based on valuations and earnings visibility.”
She reiterated that hybrid funds may not suit everyone. “Hybrid and multi-asset funds, however, are not essential for most investors, as they dilute personalised asset allocation and often come with higher costs.”
What should debt investors do in 2026?
Debt mutual funds delivered stable returns in 2025, with credit risk and medium-duration funds emerging as top performers. Looking ahead, Basant Bafna, Senior Fund Manager – Fixed Income, Mirae Asset Investment Managers (India), expects rate transmission to play a key role.
“With inflation expected to remain benign and within RBI’s tolerance band over 2026… focus is expected to tilt towards transmission of rate cuts aggregating 100 basis points undertaken in 2025.”
He added: “The Money Market curve and Corporate Bonds upto three years remain attractive with strategies relating to accruals and yield curve flattening expected to optimise risk adjusted returns.”
Equity themes, ETFs and global exposure
From an ETF and thematic perspective, Siddharth Srivastava, Head – ETF Products & Fund Manager, Mirae Asset Investment Managers (India), remains cautiously optimistic.
“We are optimistic for domestic equities next year and believe corporate earnings growth will be key for the market revival.”
He prefers diversified strategies. “We prefer multi cap allocation in broad market category.”
On commodities and global markets, he said: “In gold and silver, we remain cautiously optimistic and expect silver to have more upside though with higher drawdown risk.”
Industry growth story remains intact
Despite market volatility, the mutual fund industry saw strong structural growth. Net industry AUM rose to ₹80.80 lakh crore in November 2025, up 19% year-on-year. Equity AUM grew 17.45% to Rs 35.65 lakh crore.
According to Chirag Muni, Associate Director, Anand Rathi Wealth Limited, this resilience reflects deepening investor participation.
“Despite this challenging backdrop… the mutual fund industry remained a remarkable resilience, driven by sustained investor participation and steady inflows.” He added: “Collectively, these factors position the mutual fund industry for strong and broad-based expansion going into 2026.”
Realistic return expectations for 2026
While optimism is returning, experts urge investors to temper expectations. Deepak Jain summed it up clearly.
“Investors with a well-diversified portfolio comprising equities, bonds and precious metals should aim for returns that are about 5–6% higher than the risk-free rate at a portfolio level.”
Similarly, Swapnil Aggarwal, Director, VSRK Capital, emphasised discipline. “Asset allocation matters more than market timing, SIPs works best during volatility.”
On returns, he said: “Realistic return expectations from equity should be 10–13%, hybrid funds – 8–11%, debt funds – 6 -8%.”
Summing up…
After a turbulent 2025, the message going into 2026 is clear: discipline, diversification and realistic expectations matter more than chasing returns. As Aggarwal put it: “2026 is all about steady compounding, discipline will matter more than market timing.”
For mutual fund investors, staying invested, rebalancing thoughtfully and aligning portfolios with long-term goals may matter far more than predicting the next market move.