India’s mutual fund industry is witnessing an inflection point not seen since 2018: for the first time in seven years, one-year rolling returns across most equity mutual fund schemes have turned negative. According to the latest data from Elara Capital, aggressive equity deployment and concentrated flows have failed to cushion investors from a broad-based performance slowdown.
The trend reversal emerged starkly around August 2025, when AUM-weighted metric, which tracks the overall performance of equity mutual funds, slipped into negative territory for the first time since 2018. The one-year rolling return, a key barometer for investor sentiment and inflows, is now below zero, marking a significant break after several bullish years.
Notably, equity funds have also underperformed debt funds on a one-year rolling basis since February 2025, with the “equity premium” over debt narrowing to just 10%, the lowest gap since October 2020.
So far, investor behavior reflects rising caution. Overall pure equity mutual fund inflows have moderated over the past two months: from ₹42,700 crore in July, flows dipped to ₹33,430 crore in August and further to ₹30,400 crore in September. The Smallcap category, which had previously seen exuberant demand. has posted the second-largest decline in flows. Thematic and sectoral funds likewise remain under pressure, with most inflows now concentrated in new fund offerings (NFOs) rather than existing avenues.
A closer look at category-level data reveals that the weakening trend is broad-based rather than limited to a handful of schemes. The percentage of schemes delivering positive one-year returns within each category has fallen to its lowest levels since the COVID-19 market sell-off in 2020, according to Elara.
Also Read | Up to 10,000% returns! 10 multibagger stocks you'll wish you bought last Diwali
Median returns across largecap, midcap, and smallcap funds are all negative, with particularly sharp declines in smallcap schemes. Historically, midcaps have been more resilient than largecaps, but any persistent underperformance could signal a rotation in market leadership.
Mutual funds have responded to the inflow slowdown by deploying cash more aggressively, especially in midcap schemes. The overall cash holdings in equity schemes dropped from a peak of 6.8% in April 2025 to just 5.4% in September, now below both the 1-year and 2-year averages. In absolute terms, cash has shrunk from ₹19,000 crore to ₹15,000 crore, highlighting a shift away from caution and toward market exposure, the report said.
Another emerging risk is the rising concentration of fresh investments. The report notes that 25% of all mutual fund inflows for calendar year 2025 have been funnelled into just six stocks, with half of total flows concentrated in 19 names. Such crowding raises concerns about sector and stock-specific vulnerabilities, especially in a phase of deteriorating returns.
Also Read | Nifty gives zero returns in a year: 3 tests reveal whether to be greedy or fearful this Diwali
"With early signs of GDP growth rate upgrade seen in Sep-Oct 2025 (private consumption
forms 60%) and policy actions aimed to revive domestic consumption, we raise our Nifty50 index target to 28,433 for Dec 2026F, which is a 11% upside from the current levels,
and upgrade to Overweight from a Neutral rating," said Pramod Amthe of InCred Equities.
Nifty is currently trading at 19x 1-year forward EPS, which is at 1% discount to 15-year average and is at a discount of 5.5%-to-10-year average PE of 20.1x, domestic brokerage Prabhudas Lilladher said.
By valuing the index at 15-year average PE at 19.2x Sep27 EPS, it has arrived at a 12-month target of 28,781.
However, SAMCO Securities' Apurva Sheth said Samvat 2082 will be almost similar to what Samvat 2081 was.
"Nifty50 is likely to trade in a range of 26,277-22,281 points. The top level of this range is September 2024 high and the lower level of the range was the election day result low of June 2024. We expect the markets to trade for the majority of its time in the next Samvat (2082) within this range. This is a time-based correction for the markets," he said.
The trend reversal emerged starkly around August 2025, when AUM-weighted metric, which tracks the overall performance of equity mutual funds, slipped into negative territory for the first time since 2018. The one-year rolling return, a key barometer for investor sentiment and inflows, is now below zero, marking a significant break after several bullish years.
Notably, equity funds have also underperformed debt funds on a one-year rolling basis since February 2025, with the “equity premium” over debt narrowing to just 10%, the lowest gap since October 2020.
Best MF to invest
Looking for the best mutual funds to invest? Here are our recommendations.
So far, investor behavior reflects rising caution. Overall pure equity mutual fund inflows have moderated over the past two months: from ₹42,700 crore in July, flows dipped to ₹33,430 crore in August and further to ₹30,400 crore in September. The Smallcap category, which had previously seen exuberant demand. has posted the second-largest decline in flows. Thematic and sectoral funds likewise remain under pressure, with most inflows now concentrated in new fund offerings (NFOs) rather than existing avenues.
A closer look at category-level data reveals that the weakening trend is broad-based rather than limited to a handful of schemes. The percentage of schemes delivering positive one-year returns within each category has fallen to its lowest levels since the COVID-19 market sell-off in 2020, according to Elara.
Also Read | Up to 10,000% returns! 10 multibagger stocks you'll wish you bought last Diwali
Median returns across largecap, midcap, and smallcap funds are all negative, with particularly sharp declines in smallcap schemes. Historically, midcaps have been more resilient than largecaps, but any persistent underperformance could signal a rotation in market leadership.
Mutual funds have responded to the inflow slowdown by deploying cash more aggressively, especially in midcap schemes. The overall cash holdings in equity schemes dropped from a peak of 6.8% in April 2025 to just 5.4% in September, now below both the 1-year and 2-year averages. In absolute terms, cash has shrunk from ₹19,000 crore to ₹15,000 crore, highlighting a shift away from caution and toward market exposure, the report said.
Another emerging risk is the rising concentration of fresh investments. The report notes that 25% of all mutual fund inflows for calendar year 2025 have been funnelled into just six stocks, with half of total flows concentrated in 19 names. Such crowding raises concerns about sector and stock-specific vulnerabilities, especially in a phase of deteriorating returns.
Also Read | Nifty gives zero returns in a year: 3 tests reveal whether to be greedy or fearful this Diwali
Should mutual fund investors worry?
Market veterans say that after a year of subdued returns, the outlook has already begun to look positive as a series of fiscal and monetary measures by the government and RBI is expected to revive earnings momentum from Q3 onwards."With early signs of GDP growth rate upgrade seen in Sep-Oct 2025 (private consumption
forms 60%) and policy actions aimed to revive domestic consumption, we raise our Nifty50 index target to 28,433 for Dec 2026F, which is a 11% upside from the current levels,
and upgrade to Overweight from a Neutral rating," said Pramod Amthe of InCred Equities.
Nifty is currently trading at 19x 1-year forward EPS, which is at 1% discount to 15-year average and is at a discount of 5.5%-to-10-year average PE of 20.1x, domestic brokerage Prabhudas Lilladher said.
By valuing the index at 15-year average PE at 19.2x Sep27 EPS, it has arrived at a 12-month target of 28,781.
However, SAMCO Securities' Apurva Sheth said Samvat 2082 will be almost similar to what Samvat 2081 was.
"Nifty50 is likely to trade in a range of 26,277-22,281 points. The top level of this range is September 2024 high and the lower level of the range was the election day result low of June 2024. We expect the markets to trade for the majority of its time in the next Samvat (2082) within this range. This is a time-based correction for the markets," he said.
