Mutual funds in 2025: Innovation and quality investing take centre stage

Quality investing focuses on stocks with strong fundamentals, like high return on equity and low leverage

The volume of new fund offerings (NFOs) in 2025 will fluctuate based on market conditions. However, innovation is expec­ted to continue unabated. With an increasing number of fund houses aiming to establish a presence in the 'factor' invest­ing space and changes in fund-of-fund taxation providing more opportunities, several industry-first offerings are anticipated.

 

A look at the filings made with market regulator, the Securities and Exchange Board of India (Sebi), in recent months shows the kind of funds you can expect in the first quarter of 2025. Some of the innovative possibilities include Bandhan Rediscovery Fund (a fund that will invest in companies that move out of the Nifty 100 index). 

 

 

The fund house has also filed for a quant fund. Nippon, HDFC and a few others have plans to launch fund of funds on the fixed income side. These funds, which will invest in a mix of debt and arbitrage, will be more tax efficient compared to a plain vanilla debt fund.

 

Comeback of ‘quality’

 

Value as a style ruled the factor investing landscape for almost three years, but recent months indicate that its reign is ending. 'Quality', the other popular invest­m­ent style, has outperformed ‘value’ in recent months and the consensus is that this trend may continue in 2025. Some fund houses plan to launch an active quality fund over this expectation.

 

In quality investing, the focus is on stocks with strong fundamentals like high return on equity and low leverage. On the other hand, value investing largely focuses on the valuations.

 

As of November end, the three-month return of Nifty200 Quality 30 index stood at -6.5 per cent compared to 8.5 per cent decline in Nifty200 Value 30. However, in the one-year period the value index leads with 45 per cent return as against 26 per cent rise in the quality index.

 

Moderation in equity returns

 

Fund managers agree that equity returns in 2025 will likely be far from what it was this year. They see the higher valuations and a slowdown in corporate earnings growth, leaving little room for further upside. According to the outlook of some fund houses for the next year, the market may see a time correction till new triggers for a rally emerge. The equity market had last seen a time correction during the nearly 18-month period between September 2021 and March 2023. The market, which re-entered the bull market phase after the correction, continued till September 2024. 

 

On the debt side, fund managers say that a repeat of 2024-like performance is unlikely in 2025 for the top-performing categories. Long-duration funds topped the returns chart in 2024 with schemes delivering as much as 12 per cent.