Have you noticed any movement in your equity fund portfolio over the past one year? If no, then chances are, you have probably experienced the frustrations that come along with a stagnant stock market.
However, there’s an interesting twist to this story. While the market seemed stagnant on paper, some categories of mutual funds delivered returns of up to 20%.
How did this happen?
Here’s what really transpired.
What Actually Happened During the Period
As we all know by now, India’s leading indices have produced nearly zero returns in the past year. The Nifty 50 index has gained only around 0.99%, while others such as Nifty 100, Nifty 200, and Nifty 500 have returned only a modest 2-4%.
Such performance makes people think that ‘nothing works’ in the markets.
But the truth is, things are never as simple as they appear in markets.
Several factors have been affecting the market’s performance over the period, including:
Foreign investors continue to sell off shares.
Escalating geopolitical instability, particularly in the Middle East region
Increases in crude oil prices
Slow growth in company income
All these variables have contributed to maintaining indices’ weakness.
However, during this quiet period, some industries performed well, and portfolios that concentrated on these industries gained significantly.
The Underdogs: 3 Mutual Fund Categories That Surpassed Expectations
Despite the weak overall market performance, there are three types of equity mutual funds that outperformed expectations:
1. Auto & Transport Mutual Funds – The Best Mutual Fund Category
This industry offered nearly 20.14% gains, making it the top-performing category.
Why are auto and transportation performing so well?
Positive earnings momentum for the companies
An uptick in sales and deliveries of passenger and commercial cars
Recovery in the global EV market
The auto industry experienced an improvement in earnings growth, which the funds heavily invested in capitalized on.
2. Energy Mutual Funds – Capitalizing on Global Trends
These funds generated approximately 17.42% gains.
What made energy a good investment?
Increased crude oil prices improved margins.
Performance from energy companies
Increased focus on energy transition and infrastructure
This industry has gained from its performance at a global level and at home.
3. Manufacturing Funds — India’s Growth Story
Thematic funds with manufacturing focus gave around 16.02% returns.
It’s quite obvious why:
India’s manufacturing drive has now become an actual growth driver for the economy.
Some of the factors included:
1. Government’s “Make in India” drive
2. More capital expenditure
3. Shift towards China+1 manufacturing
Investors who invested in this structural theme reaped rich rewards.
Why Did These Categories Do Well?
Simply because of something called “sectoral rotation.”
During periods where markets move sideways, there are no losses per se. Rather, investment flows from one sector to another.
Here are a few insights:
Defensive / over-valued sectors did not do well.
Cyclical & growth-oriented sectors were in favor.
Hence, funds that actively invested in them outperformed those that invested passively / diversely.
The Big Takeaway: Diversification Isn’t Always The Way To Go!
The vast majority of investors use diversified equity funds. These funds provide good stability, but their downside is that they perform like indices most of the time.
However, sectoral/thematic funds:
Are concentrated in particular themes
Are risky, but offer high returns
Do extremely well if their theme is favorable.
And this is exactly what happened last year!
Is This an Appropriate Time to Put Money Here?
Before you get carried away with the idea:
Sector and theme-based funds are not always successful.
Why? Because:
They tend to lag badly when the tide turns.
They require skillful timing and knowledge.
They are most appropriate for seasoned or aggressive investors.
Even seasoned professionals recommend treating these investments as a satellite rather than a core investment.
Winning Strategy for Investors in 2026
If you wish to capitalize on these kinds of opportunities, try following this smart strategy:
1. Maintain a Balanced Core Portfolio
Continue investing in diversified equities or index funds that help grow your capital over the long term.
2. Increase Strategic Exposure
Include 10-20% of your investment in promising themes, which might be
Manufacturing industry
Energy production
Automotive/EV stocks
3. Stay Invested, Do Not Churn
Resist the urge to buy in after the rise of certain themes. Instead, concentrate on:
Economic cycles
Profit visibility
Government incentives
Conclusion
Here is yet another example of how even seemingly unexciting markets can conceal great opportunities.
While index performance did not impress much, those willing to venture beyond common indices have managed to achieve solid double-digit gains.
Investing in equities is never simply about being in the market.
It is also about making sure you are in the right market segment.
