Tough times for equity MFs as only 26% funds manage to beat benchmarks in January; share plunges from 61% in December

Equity mutual funds seem to be facing a challenging market environment as only around 26 percent of open-ended equity diversified funds (out of 291) managed to outperform their benchmarks in January. This was a significant decline from December when nearly 61 percent performed better than the benchmarks.

Further analysis, as per PL Wealth’s latest Mutual Fund Performance Analysis report, shows that not a single Large Cap scheme managed to beat the benchmark in January and only 17 percent of Mid Cap funds fared better than their respective benchmarks. Interestingly, Small Cap funds were the star performers with 86 percent of the funds performing better than the benchmark.

Also read: Can Nifty 50 reclaim 26,000 by December 2025?

Among other categories of funds, Multi Cap, Flexi Cap, Focused, Value Contra Dividend yield, and ELSS funds had 10 percent, 23 percent, 29 percent, 27 percent, and 32 percent outperforming, respectively.

More importantly, however, if the one-year performance of the equity funds is taken into account, around 70 percent of the funds were able to outperform their respective benchmarks, a slight dip from December when a little over 71 percent of the schemes were able to beat their benchmarks.

According to the report, the market’s negative sentiment was a key driver behind this underperformance.

“Over the past month, we’ve seen a shift from momentum-driven sectors like PSUs and defence to quality stocks. This transition has impacted mutual fund performance, particularly for those heavily invested in high-momentum stocks. However, this is part of a broader market cycle, and well-managed funds will eventually adjust and deliver strong returns,” said Pankaj Shreshta, Head-Investment at PL Capital.

On a one-month basis, the Nifty 50 TRI index fell by 0.45 percent, while the Nifty Midcap 150 TRI and Nifty Smallcap 250 TRI fell by 6.09 percent and 10.69 percent, respectively.

Also read: Smallcaps pull more retail money in January, gold ETFs shine bright, shows AMFI data: Top highlights

While the recent downturn may worry investors, Sreshta believes that investors need to look at a long-term perspective. “Mutual funds are undergoing sectoral shifts. Investors should focus on consistency rather than short-term fluctuations. Those planning to invest should consider a staggered approach, deploying capital gradually over the next three months to mitigate risks,” he explained.

Looking ahead

Ongoing heavy selling by Foreign Institutional Investors (FIIs) has contributed to the market downturn. “FII outflows have pressured stock prices, making it difficult for markets to sustain rallies. Until FII selling slows, markets may continue to face resistance despite local buying,” said Shreshta.

He believes that most of the correction is already priced in, making this a good time for investors to enter or increase allocations. “A staggered investment approach can help investors mitigate risk while capitalizing on potential rebounds. SIPs should continue, and topping up investments during downturns can enhance long-term wealth creation,” he said.

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