The Sensex and Nifty have posted double-digit decline for the first nine months of 2026. Meanwhile, the broader market fared better.
Heavy FII selling, US tariff threat, geopolitical uncertainty, elevated crude oil prices, and rising bond yields weighed on Indian equities, triggering a sharp correction since the beginning of the year.
Naturally, this decline impacted equity mutual fund returns as well. But the impact varied significantly across categories and schemes. While some categories weathered the correction relatively well, others not so much.
Even within the same category, the performance gap between the best and worst performing schemes was as wide as 30 percentage points in some cases.
In this editorial we will look at the mutual funds that stood in 2026 so far and those that struggled to keep pace with their respective benchmarks.
Let us start with the categories that stood out:
#1 Small Cap Funds
The small cap fund category generated average returns of 13.5% during the year, the highest among diversified equity funds.
Some of the top performers in the category in the current year include Bank of India Small Cap Fund, Samco Small Cap Fund, and TRUSTMF Small Cap Fund.
Small-cap companies have delivered strong earnings growth over the last few quarters, which triggered a rally in the segment.
Domestic liquidity has been another major source of support as strong systematic investment plan (SIP) contributions and continued participation from domestic institutional investors reduced the market’s dependence on foreign portfolio flows.
This helped the broader market absorb periods of global volatility and geopolitical uncertainty.
#2 Mid Cap Funds
The mid cap fund category generated average returns of 2.9% during the year.
Some of the top performers in the category in the current year include HSBC Mid Cap Fund, JM Mid Cap Fund, and Bandhan Mid Cap Fund.
Mid-cap stocks rallied in 2026 on improving earnings and strong domestic fund flows, while investors rotated away from relatively weaker large caps.
The mid-cap universe generally has more established businesses than small-caps while retaining greater earnings-growth potential than many large companies.
This combination kept investor interest high as it offered a growth sweet spot.
#3 Multi Cap Funds
The multi cap fund category generated average returns of 2.4% during the year.
Some of the top performers in the category in the current year include Groww Multi Cap Fund, Motilal Oswal Multi Cap Fund, and TRUSTMF Mutli Cap Fund.
Multi cap funds invest at least 25% each in mid and small caps stocks, meaning at least 50% of their portfolio is always exposed to smaller companies.
The recent rally in mid and small cap stocks worked in favour of multi cap funds, though the mandatory 25% allocation to large caps limited some of their gains.
Now let us look at the categories that disappointed…
#1 Large Cap Funds
On an average the large cap fund category lost 7.1% during the year.
Barring two funds, all other funds in the category generated negative returns during the year.
Some of the bottom performers in the category in the current year include Mahindra Manulife Large Cap Fund, ICICI Pru Large Cap Fund, and DSP Large Cap Fund.
One of the key reasons large-cap stocks have struggled to hold gains is due to heavy sell off by foreign institutional investors.
The decline was particularly evident in banking, oil & gas, and IT sectors, all of which have heavy-weight positions in key large-cap indices.
The selloff was primarily triggered by AI-related disruptions, US tariff threat, the US-Iran war, and rising crude prices.
#2 Contra Funds
On an average the contra fund category lost 7% during the year.
All three funds in the category namely SBI Contra Fund, Kotak Contra Fund, and Invesco India Contra Fund saw their NAV’s declining by 6-9% during the year.
Contra funds aim to invest in stocks, sectors, or themes that are currently out of favour but those that have the potential for a turnaround over medium to long term.
But in the short-term investors may continue to favour stocks and sectors with visible near-term earnings growth and those turnaround bets may remain dormant.
The market’s current preference for growth-oriented segments reinforces that contra strategies can lag when the market continues rewarding what’s already working.
#3 Value Funds
On an average the value fund category lost 3.3% during the year.
Out of the 22 funds in the category, only 5 funds generated positive returns during the year.
The bottom performing fund, ICICI Pru Value Fund registered a loss of 12.1%, while the top performing fund, LIC MF Value Fund delivered gains of 17.8%.
Notably, value funds with mid and small cap bias (such as LIC MF Value Fund) performed better than those skewed towards large caps (such as ICICI Pru Value Fund).
This highlights the investors are willing to pay more companies with higher earnings growth potential rather than stocks that appear inexpensive on valuation parameters. This preference for higher-growth companies created a headwind for portfolios positioned more conservatively.
Conclusion
For investors, the 2026 returns across categories highlights that the performance of mutual funds in any single year should not be viewed in isolation as the markets are known to be cyclical.
It would do well to look beyond recent returns and assess a fund’s performance across different market cycles, rather than chasing the latest winners.
At the same time, excessive exposure to highly risky segments, such as small cap funds, can amplify portfolio volatility when market conditions turn unfavourable.
Thus, to manage risk, investors need to focus on creating a well-diversified portfolio across categories and investment styles.
Ensure that the funds align with your investment objective, risk tolerance, and investment horizon.
Happy investing.
Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here…
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