Equity mutual funds: Muted returns
Equity mutual funds have delivered muted category-average returns over the past year: large-cap funds, 0.04 per cent; mid-cap funds, 4.6 per cent; and small-cap funds, -0.6 per cent.
Markets had recovered by the end of February. But the outbreak of conflict in West Asia and the subsequent surge in oil prices led to a sharp fall in returns. “The current war has hurt the macro environment because oil above $90 affects the current account deficit, inflation, and raw material costs,” says V Srivatsa, executive vice president (Equity), UTI AMC.
The Bloomberg consensus estimate for earnings per share (EPS) growth for next year is 13 per cent. “This could face downgrades because of higher crude and derivative prices,” says Srivatsa.
Since last April, earnings estimates for FY26 and FY27 have been downgraded, which has also kept markets muted over the past year.
Outlook: Markets need an early resolution of the war to stabilise. Even after the war ends, recovery could take time. “They will need to absorb earnings cuts arising from disruption in crude, gas, and related products,” says Srivatsa.
What investors should do: Investors should stay calm and not stop their systematic investment plans (SIPs) just because returns have fallen short of expectations. “Investors who have gone underweight in equities should right-weight gradually through SIPs and systematic transfer plans (STPs),” says Vishal Dhawan, founder and chief executive officer (CEO), Plan Ahead Wealth Advisors.
Those with adequate risk appetite may consider increasing equity exposure during this period of uncertainty, provided their goals are five to six years away.
Investors should also ensure that their portfolios remain diversified. Their equity allocation should include a mix of large-cap, mid-cap, and small-cap funds in line with their risk tolerance and time horizon. The portfolio should also include both domestic and international equity. “In some years the India-centric equity portfolio will do better, while in others the international exposure will perform better,” says Dhawan.
At the same time, investors should not become overly aggressive on equities in pursuit of short-term gains.
Debt portfolio for stability
During the year, shorter- and medium-duration funds performed better, while longer-duration funds underperformed.
Interest rates remained range-bound over the past year, with the Reserve Bank of India (RBI) staying on pause and global uncertainties keeping long-end yields volatile. “Geopolitical risks, higher SDL supply, and recent crude price volatility held back long-duration and gilt funds,” says Devang Shah, head (Fixed Income), Axis Mutual Fund.
In this environment, accrual remained the main driver of returns. “Short- and medium-duration funds benefited from high carry, surplus liquidity, and limited mark-to-market swings,” says Shah.
What investors should do: At a time when equity markets are correcting, investors should use debt mutual funds for stability, income and diversification. They should avoid trying to time interest-rate movements.
Rising oil prices could reignite inflation globally and in India. “Investors may want to move towards shorter-duration debt and away from longer-duration debt funds,” says Dhawan.
They should make two- to five-year corporate bond strategies the core of their debt allocation. “These segments offer favourable risk-reward with high credit quality, steady accrual, and lower volatility,” says Shah.
Investors may complement their core debt allocation with income-plus-arbitrage funds, which can serve as diversifiers.
They should reduce exposure to long-term debt funds bought for tactical reasons linked to falling interest rates. “Avoid taking large directional bets on long-duration or gilt funds purely on expectations of rate cuts,” says Shah.
Investors may retain long-term debt exposure if they hold the view that interest rates will gradually decline, provided they are prepared for interim mark-to-market impact.
“Long-term investors should ideally keep about 80 per cent in short-term debt and 20 per cent in long-term debt,” says Dhawan.
Investors in higher-risk, credit-oriented debt instruments should assess whether they truly have the appetite for that risk. “If geopolitical tensions, higher oil prices, and tariff-related pressures slow down economic growth, investors chasing higher returns without sufficient risk appetite may be disappointed,” says Dhawan. Experts believe this is the wrong stage of the cycle to chase higher returns by taking on credit risk.
Commodity funds: Blockbuster returns
A combination of structural and cyclical factors drove the strong performance. “Continued central bank buying, persistent geopolitical uncertainty, and rising investor interest in precious metals as a hedge supported gold,” says Vikram Dhawan, head of commodities and fund manager, Nippon India Mutual Fund.
Silver benefited from investment demand and its strong industrial linkage to energy-transition themes.
“Falling real interest rate expectations, strong exchange-traded fund (ETF) inflows, and momentum-driven participation amplified price moves,” says Vikram Dhawan.
Momentum-driven investing and trading played a major role in pushing prices to record highs in the latter part of 2025.
Outlook: The outlook for the coming year remains constructive, but blockbuster returns are unlikely to continue.
Gold and silver have already had a strong run since mid-2024, supported by robust ETF inflows and sustained central bank buying. Jewellery demand has moderated globally and in India because of elevated prices. “The structural drivers remain intact, but returns may normalise after an exceptionally strong phase,” says Vikram Dhawan.
Silver may face pressure if the global economy slows and industrial demand weakens.
What investors should do: Investors should not approach gold and silver as momentum-driven assets in the same way as equities. Returns from precious metals are lumpy, with long periods of no returns followed by short bursts of very high returns.
“Commodities can go through sharp and sudden mean reversion phases even within strong bull markets,” says Vikram Dhawan.
Investors should avoid chasing recent performance by entering after rallies or exiting after corrections. Instead, they should add gradually during phases of weakness and rebalance during phases of strong price appreciation. They should maintain a strategic allocation and avoid frequent tactical shifts.
“Investors can continue allocating to gold as long as total gold exposure stays within 10 to 15 per cent of the portfolio,” says Vishal Dhawan.
Silver is highly volatile. Investors should stay invested in it only if they are prepared for that level of volatility.
Rebalance your portfolio
Investors may have become overweight on precious metals because gold and silver rose sharply while debt and equity underperformed. “Investors should trim gold and silver holdings to lock in gains and restore original asset allocation targets,” says Abhishek Kumar, Sebi-registered investment advisor and founder, SahajMoney.com.
Arnav Pandya, founder of Moneyeduschool, suggests that investors who might be heavily exposed to small cap funds should reduce exposure to them.