If you felt like your mutual fund investments barely moved over the past year, you probably are among many as equity markets largely remained flat, testing investors’ patience. But beneath this muted performance in most equity fund categories, a few subsets quietly delivered strong gains.
Over the last one year, benchmark indices have struggled to generate meaningful returns. The Nifty delivered just 0.99%, while broader markets also remained subdued with the Nifty 100 at 2.13%, Nifty 200 at 3.63%, and Nifty 500 at 3.91%. This lacklustre performance was not without reason.
Indian equity markets faced significant pressure due to heavy foreign investor sell-offs, ongoing geopolitical tensions in the Middle East, and elevated crude oil prices. Adding to this, muted corporate earnings growth in several sectors further dampened sentiment.
Yet, even in this challenging environment, some equity mutual fund categories stood out.
Top performers: These 3 categories beat the market
Data from Value Research shows that three sectoral/thematic fund categories delivered significantly higher returns than the broader market over the past year:
Sectoral – Auto & Transportation funds: 20.14%
(based on 17 funds)
Thematic – Energy funds: 17.42%
(based on 8 funds)
Thematic – Manufacturing funds: 16.02%
(based on 20 funds)
These are category average returns, which means the actual performance reflects the broader trend across funds within each segment — not just a few outliers.
How do these compare with other equity fund categories?
To put this in perspective, most diversified equity fund categories delivered far more modest returns:
Largecap funds: 4.70%
Midcap funds: 12.24%
Smallcap funds: 7.55%
Flexicap funds: 5.87%
Multicap funds: 7.35%
Among these, only midcap funds managed to deliver double-digit returns, while all others remained in single digits. This clearly highlights how auto, energy and manufacturing-themed funds significantly outperformed their diversified peers.
How did these sectoral/thematic fund categories outperform?
The outperformance of these three equity sub-categories wasn’t accidental. It was driven by strong sector-specific tailwinds, even as the broader market struggled.
Auto-focused funds benefited from robust domestic demand, especially in passenger vehicles and premium segments. At the same time, easing input costs helped improve margins, boosting earnings for companies in this space.
Energy funds, particularly those with exposure to PSU and power companies, gained from strong balance sheets and steady cash flows. Government initiatives around energy security and infrastructure push, along with relatively stable crude dynamics supported the sector.
Manufacturing funds rode on a bigger structural story. The capex cycle revival, government-backed PLI (Production Linked Incentive) schemes, and the global China+1 supply chain shift helped improve order books and earnings visibility for manufacturing companies.
In contrast, broader indices were weighed down by underperformance in sectors like IT and financials at various points, limiting overall market returns.
These thematic pockets, however, remained earnings-resilient and policy-supported, allowing them to outperform.
Investor interest remained, but flows cooled
Interestingly, while returns remained strong, fresh investor money slowed down. According to the Association of Mutual Funds in India (AMFI), sectoral and thematic funds — which include auto, energy and manufacturing — saw total inflows of around Rs 30,000 crore between April 2025 and March 2026.
This marks a sharp drop compared to FY25, when these categories saw a surge in inflows, largely driven by new fund launches and thematic investing buzz.
It’s also important to note that AMFI does not disclose inflows at an individual theme level. So, categories like auto, energy and manufacturing are part of this combined pool. The data suggests that while investor interest remained intact, fresh allocations became more cautious.
What should investors keep in mind?
While the strong returns from these categories may look attractive, investors need to tread carefully. Sectoral and thematic funds are inherently high-risk because they concentrate investments in a limited set of sectors or themes.
Their performance tends to be cyclical and dependent on specific economic or policy factors, which means they may not sustain outperformance over longer periods.
Most importantly, past returns do not guarantee future performance. The strong gains seen in auto, energy and manufacturing funds over the past year may not necessarily repeat going forward, especially if sector dynamics change.
Summing up…
The performance of these three equity sub-categories has been a reminder that even when markets appear stagnant, opportunities still exist beneath the surface. Investors who were aligned with the right themes managed to generate meaningful returns despite a flat market.
However, chasing past winners without understanding the underlying risks can backfire. A balanced approach — combining core diversified funds with selective thematic exposure — remains a more sustainable strategy for most investors.
Disclaimer:
The returns mentioned in this article are based on category average performance over the past one year, sourced from Value Research data. Past performance is not indicative of future returns. Sectoral and thematic funds are subject to higher volatility and concentration risks compared to diversified equity funds. Investors should assess their risk profile and investment horizon, and consider consulting a financial advisor before making investment decisions.