HOW DID WE CAPTURE SECTOR PREFERENCES?

HOW DID WE CAPTURE SECTOR PREFERENCES?

Before we get into sector preferences, here is something to grasp at a macro level. These sector preferences are based on equity investments across equity funds, passive funds, and hybrid funds. It gives a more comprehensive picture. To encapsulate; Total equity AUM of Indian mutual funds stood at ₹52.05 trillion (1 trillion is 1 lakh crore) as of May 2026. This reflects a growth in AUM of 1.22% over last month and a growth of 14.57% over last year.

How did we arrive at the sector preference rankings of mutual funds for May 2026?

The first step was to rank the sector preferences on 4 parameters; MOM change in absolute AUM, MOM change in % AUM, YOY change in absolute AUM, and YOY change in % AUM. Sectors are ranked individually on each of these 4 parameters.

Why have we combined these 4 parameters. The MOM change captures the short-term trend while the YOY change captures the longer-term trend in sectoral shifts. Also, absolute changes tend to be partial to large sectors. Hence, we have also introduced percentage change in AUM to capture the trend in smaller sectors too.

To make the sectoral comparison more meaningful, we eliminated sectors that had mutual fund AUM of less than ₹10,000 crore. These smaller sectors could substantially distort the results and were kept out of the rankings.

The average rank was calculated as the arithmetic average of ranks on the four parameters explained above. The sector with the best combined rank was placed on top and the sector with the worst rank was placed at the bottom. Only 15 sectors are presented here out of the 30 sectors evaluated.

SECTORAL PREFERENCES OF MUTUAL FUNDS – MAY 2026

Here is a quick snapshot of the sectoral preference ranks of Indian mutual funds.

The above combined rank does not reflect anything in isolation. What it tells us which way the winds of mutual fund sectoral preferences are blowing. Here are some key takeaways.

Not surprisingly, the healthcare sector has emerged on top. Even as FPIs have been net sellers in mutual funds, domestic funds have been buying. This is due to factors like a defensive play, an end to American tariff risk, huge opportunities in CDMO, as well as the nearly $30 billion of drugs going off patent in the next couple of years.

Among the top 5 preferred sectors, there are 3 consumer plays; Retail, Automobiles and Aviation. Clearly, Indian mutual funds are betting on Indian consumer demand remaining robust. That is not surprising since India has a strong domestic demand story driving growth, rather than an export call.

In the capital goods space, there is a divergence emerging. Manufacture of capital goods is attracting MF buying. However, MFs are going slow on other support sectors for capital cycle like metals, mining, power, chemicals etc. MFs are expecting most of the incremental alpha to come from the big capital equipment shortfall in India.

Some of the erstwhile favourites have slipped. BFSI has slipped to lower due to caution at higher levels. Also, telecom appetite seems to be slowing. This can be attributed to the frenetic rally in Bharti Airtel, as well as mutual funds building up their reserves to apply for the Jio Platforms IPO.

There were some big sectors at the bottom. FMCG, Oil & Gas, and IT Services; with combined Mutual Fund AUM of over ₹8.57 trillion, are ranked at the bottom. MFs have been rightsizing their exposure to IT and FMCG. In case of oil & gas, it is more of “wait and watch”, as to which companies make the transition from oil to gas.

Unlike the FPIs, who have almost given up on India in the last couple of years, domestic mutual funds appear to be buying aggressively, albeit selectively. That is the good news!