“After years of easy equity gains, FY26 has flipped the script; most mutual funds failed, exposing a deeper shift markets may not be fully pricing yet.”
What Just Changed
A sharp reality check has emerged for investors:
Less than half of India’s equity mutual funds delivered positive returns in FY26.
- Only ~46% funds (253 out of 553) generated gains
- That means more than half of equity funds lost money or stayed flat
This is a major shift in market behaviour, especially after multiple years of strong equity returns. This comes despite benchmark indices staying relatively stable, highlighting a growing divergence between index performance and actual investor returns.
Why This Matters Right Now
This isn’t just a mutual fund story; it reflects a deeper market signal:
👉 Markets are no longer delivering broad-based gains
👉 Returns are becoming highly selective and narrow
👉 Passive “just stay invested” strategies are being tested
In simple terms:
The market is still moving but fewer participants are making money
What Actually Worked (And Why)
The biggest outperformers in FY26 were international funds, not domestic equities.
Top performers included:
- Taiwan-focused equity funds
- Global mining and commodity plays
- AI and tech-driven global funds
Why they outperformed:
- Strong rally in US tech and AI stocks
- Commodity and energy cycle strength
- Rupee depreciation boosting overseas returns
👉 Translation for markets:
Global trends mattered more than domestic momentum in FY26
The Real Market Signal
This data is pointing to a structural shift in market behaviour:
1️⃣ Breadth is weakening
Even if indices hold up, fewer stocks (and funds) are participating.
2️⃣ Sector rotation is sharp
Generic diversification is not enough allocation matters more than ever
3️⃣ Passive optimism is fading
Markets are rewarding:
- global exposure
- thematic bets
- selective positioning
…and penalising:
- broad, undifferentiated portfolios
What This Means for Investors & Traders
For Investors:
- Avoid chasing last year’s winners (especially global funds)
- Stick to diversified allocation (10–20% global exposure)
- Focus on large-cap and balanced strategies for stability
For Traders:
- Expect fragmented market moves
- Index strength ≠ broad market strength
- Sector-based opportunities likely to dominate
Hidden Risk Markets May Be Underestimating
- If global tech momentum slows, recent outperformers could see sharp reversals
- Commodity cycles remain volatile and may not sustain current returns
- Elevated valuations in pockets of the domestic market leave limited margin for error
The bigger risk: Markets may be transitioning from liquidity-driven gains to earnings-dependent performance, a shift that typically reduces broad-based returns.
What to Watch Next (Critical for FY27)
“The key question for FY27 is whether earnings growth can broaden market participation or if leadership remains narrow, keeping opportunities highly selective.”
Markets are already showing early signs of transition:
- Large-cap leadership is starting to re-emerge
- Focus is shifting toward domestic earnings visibility
- Early rotation away from overcrowded global and thematic trades
However, uncertainty remains around how sustainable this shift will be, especially if global cues weaken or earnings momentum disappoints.
Experts remain constructive on FY27, but with one clear caveat:
Returns are likely to be more selective, slower, and uneven with positioning and allocation becoming more critical than broad market exposure.
Bottom Line
This isn’t just a bad year for mutual funds.
It’s a warning signal:
👉 Markets are entering a phase where
“Being in the market” is no longer enough; positioning matters.
Also Read: West Asia Crisis May Trigger ₹25,000 Cr Fertiliser Shock — Is India’s Fiscal Math at Risk Again?
FAQs
1. Why did most equity mutual funds underperform in FY26?
Because market gains were narrow, with only select sectors and global themes outperforming, while broader domestic equities saw volatility and corrections.
2. Did stock markets perform badly in FY26?
Not exactly. Benchmark indices held relatively steady, but market breadth weakened, meaning fewer stocks contributed to gains.
3. Why did international funds outperform Indian equity funds?
Strong US tech and AI rally, commodity cycles, and rupee depreciation boosted global fund returns compared to domestic markets.
4. Is this a negative signal for FY27 markets?
Not necessarily, but it suggests returns may become more selective, slower, and dependent on earnings rather than liquidity.
5. Should investors increase global exposure now?
Caution is advised. Global funds have already outperformed, and future returns may moderate if global cycles reverse.
6. What is the biggest takeaway for investors?
Broad market investing alone may not work; allocation, sector selection, and diversification are becoming more critical.
