Sectoral mutual funds: Why investors should explore banking, auto, power and healthcare funds now

If you are looking to invest in sectoral mutual funds, it is important to check market sentiment and the factors driving it.

According to the latest quarterly note, Quarter of Divergence: Resilient India, Restless World, by Prateek Nigudkar, Senior Fund Manager at Shriram AMC, the first half of FY27 has seen a sharp divergence between large-caps and the broader market. The Nifty 50 gave up most of its first-quarter gains, falling about 6% in September alone.

The Nifty 50 rose just 1.3% in H1FY27, while the Nifty Smallcap 250 gained 24.6%. Nigudkar attributes much of this performance gap to contrasting investment flows, noting that large-caps now offer better valuations relative to their historical averages.

For mutual fund investors, however, sectoral opportunities need to be assessed against the relevant sector benchmarks, valuations, and underlying business prospects.

Which sectoral mutual funds offer opportunities for mutual fund investors?

Here is what investors can look at, along with benchmarks they can use to compare sector-focused schemes.

Financial services: Positive

Nigudkar is positive on banks and the life insurance segment, citing attractive valuations following the market correction. Several high-quality private banks are trading near or below their long-term average valuation multiples despite steady credit growth, stable asset quality and a strong economy.

On life insurance, he flags regulatory uncertainty around the Insurance Regulatory and Development Authority of India’s (IRDAI) proposed rules on expenses of management (EoM) and distribution. However, Nigudkar expects the final regulations to be more measured, with longer implementation timelines and product-level flexibility.

This means investors can compare relevant schemes with the Nifty Bank and Nifty Financial Services indices, while recognising that these benchmarks have different sector compositions.

Automobiles: Positive

Nigudkar remains positive on automobiles, citing attractive valuations and a recovery in volumes following GST-related changes. The festival season is a key near-term test of demand.

He also flags raw-material inflation, particularly in steel, aluminium and precious metals, as a factor that could weigh on margins if manufacturers are unable to pass on higher costs.

The Nifty Auto index can help investors assess the performance of automobile-focused funds against the broader sector.

Power: Positive

Nigudkar remains positive on the power value chain, supported by industrial activity, electrification, data centres and transmission capital expenditure.

The Nifty Power index is a relevant benchmark for power-focused funds, while the Nifty Energy index offers broader energy-sector exposure.

Healthcare: Positive

Nigudkar is positive on healthcare and has added to hospital exposure following a sharp correction in hospital stocks.

For comparison, the Nifty Healthcare index offers a broader healthcare benchmark, whereas the Nifty Pharma index is better suited to pharmaceutical-focused schemes.

Transportation: Positive

Nigudkar remains positive on the transportation sector, particularly ports and airports. He sees opportunities in ports, supported by government investment in port infrastructure.

Real estate: Selective add

Nigudkar has added a developer from the National Capital Region (NCR), citing its large, low-cost land bank and strong pipeline of luxury housing launches. He sees resilience in premium housing demand and believes the land bank provides multi-year visibility on pre-sales.

The Nifty Realty index can help investors compare the performance of real estate-focused funds with the listed real estate sector.

Telecom: Neutral to positive

Nigudkar’s outlook is neutral to positive, as headline tariff hikes may be delayed until FY28.

“ARPU should continue to grind higher through plan re-engineering and premiumization, and capex intensity is falling, but the near-term catalyst has moved out,” he added.