Mutual Fund Performance in FY26: A Sharp Deterioration in Returns
India's mutual fund industry experienced a dramatic reversal in fortunes during fiscal year 2025–26 (FY26), with the number of schemes posting negative annual returns rising nearly threefold. According to the Securities and Exchange Board of India's (SEBI) latest annual report, 731 mutual fund schemes generated negative returns, compared with just 243 schemes in FY25. At the same time, the number of schemes delivering double-digit gains fell sharply, highlighting a subdued investment environment shaped by market volatility, sectoral corrections, and global economic uncertainties.
A Year That Tested Investor Expectations
Mutual funds have become one of India's preferred investment avenues, driven by the rapid growth of Systematic Investment Plans (SIPs) and rising retail participation. While long-term investors have historically benefited from market cycles, FY26 served as a reminder that annual returns can fluctuate significantly even in a growing economy.
SEBI's scheme-wise performance data illustrates the depth of the downturn and underscores the importance of managing expectations during volatile market phases.
The Numbers Behind the Decline
SEBI analysed 1,841 mutual fund schemes during FY26, and nearly 40% of them—731 schemes—ended the year with negative returns, a substantial jump from 243 out of 1,617 schemes in the previous fiscal.
The breakdown reveals how widespread the weakness became:
· 93 schemes recorded losses exceeding 10%, compared with 30 a year earlier.
· 146 schemes fell in the –10% to –5% range, up from 41.
· 492 schemes posted losses between –5% and 0%, compared with 172 previously.
· Schemes earning 5–10% returns dropped sharply from 852 to 539.
· Only 198 schemes managed returns above 10%, down from 304 in FY25.
The data reflects a broad-based slowdown rather than isolated underperformance.
Why Returns Weakened
Several factors contributed to FY26's disappointing performance. Indian equity markets experienced heightened volatility as mid-cap and small-cap stocks, which had previously powered strong mutual fund gains, underwent significant corrections.
Global challenges—including elevated interest rates, geopolitical tensions, and fluctuating foreign institutional investor (FII) flows—added pressure on market sentiment. Debt funds also navigated uncertainty over interest-rate movements, while hybrid and sector-specific funds produced uneven results across different asset classes.
Together, these conditions created a difficult backdrop for fund managers.
Investors Stay the Course
Despite weaker returns, retail investors showed remarkable resilience. SIP inflows remained close to record highs, even as equity fund inflows declined by around 15% in July 2026.
This behaviour suggests that many long-term investors viewed market corrections as buying opportunities rather than reasons to exit. The continued commitment to SIPs reinforces growing awareness that disciplined investing often outperforms attempts to time the market.
A Lesson in Risk, Patience and Diversification
FY26 challenges the popular assumption that mutual funds consistently deliver 12–15% annual returns. While such returns are possible over long investment horizons, they are never guaranteed in individual years.
The sharp increase in loss-making schemes reinforces the need for diversified portfolios, realistic return expectations, and investment choices aligned with personal risk tolerance. For SEBI and fund houses, the episode also strengthens the case for better investor education and greater transparency. Ultimately, FY26 reminds investors that mutual funds remain powerful wealth-creation tools—but their greatest strength lies in patience through market cycles, not in chasing short-term gains.
(With agency inputs)
