 "Mutual funds (MFs) are gearing up with offerings centered on the ‘quality' theme, as this investment approach is expected to rebound following three years of underperformance compared to the ‘value' theme.")
The Indian primary market saw a 2.6-fold increase in equity issuances in 2024, with over 317 initial public offers (IPOs) raising an unprecedented Rs 1.8 trillion, surpassing the previous record of Rs 1.3 trillion in 2021 and outpacing Rs 576 billion raised in 2023, said Canara Robeco Mutual Fund in its annual outlook report.
Sectoral mutual funds increased assets under management by 79% in 2024. Small-cap funds grew to Rs 3. 26 lakh crore. Mid-cap funds surged to ₹3. 89 lakh crore. Large-cap AUM reached Rs 3. 62 lakh crore. Index funds and ETFs saw a 28% increase. SIP accounts hit 10 crore in November 2024. The fund house believes that the rebound in FII inflow may be short-lived but massive domestic inflow will continue to support the market. It is bullish on realty, healthcare, pharma, infrastructure, banks, FMCG and energy sectors but is negative on prospects of auto and metal sectors. The fund house favours largecaps over mid and smallcaps for the year 2025.
Which sectors should investors bet on in 2025?
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In 2024, several sectors demonstrated strong returns:
- Realty: +43.25%
- Healthcare: +36.16%
- Pharma: +33.11%
- IT: +31.07%
- Auto: +28.75% (declining)
- Infrastructure: +23.19%
- Metal: +17.79% (declining)
- Oil & Gas: +17.71% (neutral)
- Banking: +11.94%
- Energy: +11.89%
- FMCG: +1.37%
- The NIFTY 50 TRI index recorded an overall return of +14.85%.
Rationale for 2025
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Market Consolidation: After nearly four years of strong growth, the Indian equities market began to consolidate in late 2024 due to factors such as high inflation, tepid corporate earnings, and a cautious Reserve Bank of India stance.
Large Cap Potential: The report suggests that large-cap stocks may outperform in 2025. Currently, the share of Nifty 100 stocks is near historic lows, which could indicate a recovery opportunity for large caps.
Valuation Opportunities: Large-cap stocks are currently undervalued compared to the broader Nifty 500 index, making them an attractive option for investors.
Earnings and Investment Trends: While sectors like auto and metal are facing headwinds due to slowing demand and global economic issues, sectors such as infrastructure and healthcare continue to show promise driven by government spending and steady earnings growth.
FII Trends: Foreign Institutional Investors (FIIs) have been cautious, favoring markets like the US and China. This shift might provide a favorable environment for large-cap stocks as investors seek stability.
The outlook for 2025 is optimistic but cautious. With expectations of slowing growth due to persistent inflation and delayed state investments, large-cap stocks are positioned to benefit from mean reversion and favorable valuations. Investors are advised to maintain a long-term perspective, focusing on quality stocks with solid growth potential.
"In accordance with our estimates, growth is anticipated to weaken in 2025 owing to sticky inflation and delays in state investment which leads to declining urban consumption. After a near four-year bull run, Indian equities have begun to consolidate in the last three months as growth and urban demand have slowed. Its natural for the markets to let off some steam after a significant bull run. We believe 2025 would be the year favoring the large cap segment," said Canara Robeco MF's 2025 outlook report.
What about fixed income funds?
"Indian bonds have remained resilient despite external challenges. India's stable macroeconomic environment has contributed to bond market growth alongside credit durability for the corporates. Institutional investors' steady interest in Indian bonds, including pension funds, insurance companies, and mutual funds, maintains the market's upward trajectory of demand in comparison to the global counterparts," said the Fund House. It believes higher duration category of funds, which includes Corporate Bond Funds, Dynamic Bond Funds, and Gilt Funds, stand to gain from the current financial environment. When market conditions favor longer durations, these funds attract more investments.
Short- to medium-term funds may also see some benefits. Investors who are already in the market may benefit more as they enjoy the returns associated with longer durations. This is especially true now, as these funds may be more appealing due to the current interest rate climate.
"New investors entering the market can take advantage of the stabilizing interest rates, which the Reserve Bank of India has kept unchanged since April 2023. The steady rates mean that there is less volatility in returns, making it easier for newcomers to understand the potential growth of their investments. Overall, while both existing and new investors have opportunities in this market, those invested in higher-duration funds are likely to see greater rewards, as per our view," said Canara Robeco MF.
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