Don't follow the herd: Which mutual funds should you bet on in 2025?

Investors should spread their money across different asset classes, sectors and regions, says Mayank Misra

Mutual funds in 2024 focused on passive investing and picked sectors like artificial intelligence (AI) and renewable energy. The industry found new customers in Tier-II and -III cities. MAYANK MISRA, vice-president of product management for mutual funds at INDmoney, in an email interaction with Ayush Mishra, listed the likely themes in 2025. He wrote about strategies investors may take to navigate market volatility.

 

Mutual fund industry in 2025

 

“With Sebi’s focus on cost reduction and growing investor awareness, passive funds and smart beta strategies are expected to gain significant traction. Investors may explore combining active and passive methods for better risk-adjusted returns,” said Misra.

 

 

He believes that with simplified onboarding and regulatory initiatives like CKYC (Central KYC) and Aadhaar-based onboarding, mutual fund investments will become even more seamless. This will drive growth in retail participation, especially in Tier II and III cities, fueled by SIPs and financial literacy campaigns.

 

Thematic funds

 

Funds targeting sectors like AI, electric vehicles (EV), and renewable energy are expected to gain popularity. Global diversification funds offering exposure to foreign equities, particularly in underrepresented sectors in India, will also see increased demand. Interest in global markets like the United States and China will further boost feeder funds.

 

Micro SIPs

 

Low initial investment thresholds will attract young and first-time investors. As incomes grow, investors are likely to increase their SIP contributions, further driving industry growth.

 

How do you anticipate investors' preference in 2025?

 

“Direct plan mutual funds, launched in 2013, have shown significant growth. For instance, AMFI data for April-September 2024 reveals that they represent nearly 50 per cent of the total new Equity AUM, up from 32 per cent in the same period in 2023. This 18 per cent jump highlights accelerated retail investor preference for mutual funds via Direct mutual funds,” Misra noted.

 

Global diversification

 

Investors are increasingly recognising the importance of diversification and investing in global technology trends such as AI, EVs, robotics, and other emerging technologies. These preferences are expected to strengthen in 2025.

 

Which mutual funds will be popular in 2025?

 

Passive funds (Index Funds): Their lower expense ratios and market trends favoring benchmarks like Nifty 50, Sensex, and global indices (e.g., Nasdaq 100) will likely continue driving their popularity.

 

Thematic and sectoral funds: Investors will capitalise on high-growth themes like AI, EVs, renewable energy and health care.

 

Global equity funds: Indian investors will seek exposure to international markets like the United States, China and Europe for diversification.

 

What role do you see for passive funds and smart beta strategies in 2025?

 

Dominance of passive funds

 

Cost-conscious and broad-market investing will drive the growth of passive funds. They will play a significant role in increasing retail participation.

 

Emergence of smart beta strategies

 

“Smart beta strategies will bridge passive and active management, offering enhanced returns with a rules-based approach. For investors transitioning from active to passive, these funds offer a great middle ground,” Misra said.

 

Which themes should investors focus on?

 

Thematic funds are likely to see strong interest in 2025. While these funds come with higher risk due to their concentrated nature, themes aligned with structural growth areas, government policies, and global mega-trends may deliver substantial outperformance compared to diversified funds. Younger investors with higher risk tolerance are likely to flock toward thematic funds to benefit from emerging trends.

 

A few popular themes can be:

 

Green energy and sustainability: Companies in solar, wind and electric mobility sectors will benefit from increased adoption and government incentives.

 

Consumer discretionary and retail Growth: Rising incomes and urbanisation will drive demand for premium products and organised retail.

 

EVs and mobility solutions: Supportive government policies and investments in charging infrastructure and battery technologies will accelerate growth.

 

How might macroeconomic factors such as inflation and interest rates impact mutual funds in 2025?

 

Equity funds: High inflation benefits companies with pricing power in sectors like consumer staples and energy. Growth stocks in technology may underperform due to compressed future earnings.

 

Debt funds: Rising interest rates will impact long-duration debt funds negatively. Short-term and floating-rate funds will perform better due to lower sensitivity to rate changes.

 

Defensive sectors: Health care and consumer staples tend to outperform during high-interest rate environments due to stable earnings.

 

What is your outlook on international investments for Indian mutual funds in 2025?

 

Very positive. The US markets, especially in technology and innovation-driven sectors, are expected to remain attractive, driven by advancements in AI, robotics, and green energy. Feeder funds investing in the US indices (like the S&P 500 or Nasdaq 100) will continue to attract Indian investors seeking exposure to globally dominant companies. China's economic rebalancing - after facing challenges in 2023–2024, China’s potential recovery in 2025 could offer investment opportunities in its tech, renewable energy, and consumer sectors. Funds with Asia-Pacific exposure could benefit. A depreciating rupee enhances the returns of international investments when converted back to rupees, making such investments appealing. Funds with significant exposure to dollar-denominated assets may benefit from currency appreciation against the rupee.

 

How do you recommend investors manage risks associated with market volatility in 2025?

 

Diversify investments: Spread investments across asset classes, sectors, and geographies.

 

Adopt SIPs: They reduce the impact of market timing and instill investment discipline.

 

Stay Invested: Focus on long-term goals rather than short-term market fluctuations.

 

What measures should mutual fund managers take to mitigate liquidity and market risks?

 

Maintain adequate cash and liquid assets. Liquidity is crucial to meet redemption requests without selling assets at a loss. Maintain a portion of the portfolio in highly liquid instruments, such as treasury bills, cash equivalents, or money market securities. Use stress testing to estimate potential redemption demands and keep buffers. Monitor Liquidity Metrics and Redemption Patterns. Early identification of liquidity challenges allows for timely corrective actions. Regularly review metrics like bid-ask spreads, trading volumes, and portfolio turnover ratios. Analyse redemption trends to anticipate and plan for large withdrawals.

 

Which sectors do you believe will offer the best investment opportunities in 2025?

 

Green energy and sustainability: Solar and wind energy companies, EV battery manufacturers.

 

Technology and digital transformation: AI, automation, and semiconductor firms.

 

Consumer goods and E-commerce: Rising disposable incomes and increasing online shopping trends.

 

What advice would you give to new investors looking to enter the mutual fund space in 2025?

 

Start with your financial goals.

 

Define clear goals: Identify your objectives: Retirement planning, buying a house, children’s education, or wealth creation.

 

Align investments with goals: Choose funds that match your goals' time horizon and risk appetite. Short-term goals: Consider debt funds or liquid funds.

 

Long-term goals: Go for equity mutual funds or hybrid funds. Beware of timing the market. Stick to disciplined investing through SIPs rather than timing market highs and lows. Avoid herd mentality: Choose funds based on your goals, not market fads.