Defence, gold and BFSI mutual funds shine in a stormy 2025

In 2025, when Indian mutual funds have seen a turbulent year, marked by widespread underperformance across categories, around 70 percent funds have managed to deliver positive returns on a year-to-date (YTD) basis.

Indian equities are showing tepid returns this year, with the Nifty 50 rising just 4.68 percent since the start of the year till May 28, 2025. However, the Nifty Midcap 150 index is down 0.46 percent, while the Nifty Smallcap 250 index has plunged 5.89 percent so far.

Things were much worse early in the year, with the Nifty 50 showing a maximum drawdown of 9 percent, while the Nifty Midcap 150 and Nifty Smallcap 250 were down up to 26 percent each.

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Amid trade tensions between the US and China, tepid domestic earnings and the India-Pakistan war, Indian equities have been seeing heightened volatility.

“Even before all of this, Indian equities were undergoing a healthy correction phase. Valuations became much more palatable, and the opportunities were looking very good in select pockets. So, several mutual funds, especially thematic ones, have been able to capitalise on the cycle of opportunities with conviction. With the entire upcycle coming in, the broader equities have also done well, but there are a few that did well more than the others,” said Nirav Karkera, Head of Research at Fisdom, wealthtech firm.

Data available with ACE MF, a mutual fund research platform, shows that there are nearly 1,800 mutual fund schemes across equity, debt and hybrid categories. Out of them, around 1,650 funds have at least a track record of five months.

Of these, 1,162 schemes are showing positive returns on a YTD basis till May 28.

 

Here’s an overview of the key trends and standout performers.

Winners so far in 2025

The best-performing scheme of 2025 on a YTD basis is the DSP World Gold Fund of Fund (FoF), an overseas fund, which invests in companies related to gold and the gold mining sector. This is a direct impact of international gold prices rising more than 25 percent in the last five months.

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Interestingly, gold is among the best domestic fund categories this year, with average YTD returns of 24 percent.

The first five months of 2025 witnessed a dynamic gold market, marked by record-setting prices and notable shifts in demand across various sectors.

According to a note by Motilal Oswal Private Wealth, the main factors fuelling this price rally are the tariff wars, geopolitical uncertainty, stock market volatility, and the weakness of the US dollar.

Notably, the top fund category of the year is defence funds, with average returns of over 30 percent so far.

Defence stocks have seen a strong uptick, triggered by the India-Pakistan war and the government’s approval of defence orders worth Rs 54,000 crore. Additionally, the broader improvement in investor sentiment has further supported the rally.

Another sector that has done well is banking, financial service and insurance sector, with funds focused on these categories delivering an average 8 percent returns so far this year.

“Valuations have worked well in banking and financial services funds. Around March 2025, many major banks were available at pre-COVID valuations. So, it was a no-brainer that value investing was the way to go. Hence, money ploughed into banking and financial services funds,” said Kirtan Shah, founder of Credence Wealth.

Mutual fund laggards

Year 2025 has been a period when high-flying information technology stocks failed to enthuse investors. On a YTD basis, IT mutual funds, on an average, are down over 11 percent, making it the worst-performing category.

The IT sector has underperformed, primarily owing to the impact of tariff tantrums, the United States’ DOGE (Department of Government Efficiency) and potential backlash by China, the EU and other economies in response to the tariffs, which has played out.

DOGE, a US federal initiative led by Elon Musk, is aimed at reducing government spending. It had a notable impact on IT and technology stocks.

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Similarly, digital India and other thematic category funds also underwhelmed.

Further, due to a risk-off strategy of investors and tepid markets, smallcap funds and momentum funds also featured among the worst- performing categories.

Investment strategy

According to Shah, value as an investing style will do well in the year ahead, as markets are not that cheap. “There is still less clarity on whether or not there is going to be more time correction or value correction. Plus, there is a lot of global overhang around what Trump will do and what global policymakers are doing and what’s happening to yields in Japan and the US,” said Shah.

Further, according to Motilal Oswal Private Wealth, valuations for largecaps (Nifty 50) have moved from attractive to fair following the recent rally. So, return expectations should be moderated.

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“While midcaps and smallcaps continue to trade at a premium relative to long-term averages, select opportunities are beginning to emerge in these segments,” it said.

Motilal Oswal Private Wealth suggests a lump sum approach in hybrid, largecap, and flexicap funds, while for midcap and smallcap strategies, a staggered investment approach over the next 2-3 months is advised, with any market pullback offering an opportunity for more aggressive deployment is recommended.