For years, mutual funds were positioned as the most reliable way for Indian investors to participate in long-term wealth creation. SIPs became a habit, diversification became a mantra, and staying invested through volatility was widely promoted as the “right” approach.
Yet in 2025, many investors are questioning that belief.
Despite doing everything by the book, portfolios look underwhelming. NAVs are stagnant or falling. SIP returns are far lower than expected. Even conservative investors feel uneasy. This disconnect has led many to ask why mutual funds are going down in 2025, and whether this phase signals something deeper than a routine market correction.
This article examines the issue calmly and objectively. It explains the economic, market, and behavioral factors behind the current downturn, places 2025 in historical context, and evaluates whether mutual funds are likely to make a meaningful comeback.
Are Mutual Funds Really Going Down in 2025?
To understand why mutual funds are going down in 2025, it is important to first define what “going down” actually means.
Most investors are reacting to a combination of:
- Flat or negative one-year returns
- Declining or muted SIP XIRR
- Sharp contrast with the strong returns seen between 2021 and 2023
Importantly, this phase is not a market crash. Broad indices have not collapsed. Corporate India continues to grow, and domestic inflows remain strong. However, after several years of above-average returns, markets are now going through a phase of consolidation and correction.
When expectations are shaped by unusually strong past performance, even normal market behaviour can feel like failure.
Why Mutual Funds Are Going Down in 2025: The Key Reasons
1. High Interest Rates Are Pressuring Markets
One of the most important reasons why mutual funds are going down in 2025 is the prolonged high-interest-rate environment.
The RBI maintained a tight monetary stance to control inflation, and interest rates stayed elevated longer than many investors anticipated. High rates impact mutual funds in multiple ways:
- Companies face higher borrowing costs, which affects profitability
- Equity valuations fall as future cash flows are discounted at higher rates
- Debt mutual funds experience mark-to-market losses as bond yields rise
This has created a rare environment where both equity and debt mutual funds are under pressure, leaving investors with few places to hide.
2. Valuation Reset After an Extended Bull Market
Between 2021 and 2023, Indian markets benefited from excess liquidity, strong retail participation, and optimism around India’s long-term growth story. Many mutual funds increased exposure to mid-cap and small-cap stocks, which delivered outsized gains during this period.
By 2024 and 2025, earnings growth failed to justify earlier valuations. The result was a valuation correction, particularly in expensive market segments. This reset is a major reason why mutual funds are going down in 2025, especially for investors heavily exposed to mid-cap and small-cap funds.
Corrections of this nature are not unusual after long bull runs. They are part of market cycles.
3. FPI Outflows and Global Capital Movement
Foreign Portfolio Investors have been consistent sellers of Indian equities in 2025. Global factors such as high US interest rates, geopolitical uncertainty, and currency volatility have led global investors to reduce exposure to emerging markets.
FPI selling impacts mutual funds by:
- Increasing market volatility
- Reducing liquidity in certain sectors
- Amplifying short-term corrections
Although domestic SIP inflows remain strong, they cannot fully offset the impact of large foreign exits in the short term.
4. Global Economic Uncertainty
Indian mutual funds are influenced by global conditions, even when domestic fundamentals remain stable. In 2025, global markets are dealing with:
- Uncertainty around the US Federal Reserve’s policy direction
- Ongoing geopolitical conflicts
- A strong US dollar affecting emerging markets
This global risk-off environment has dampened investor sentiment, contributing further to why mutual funds are going down in 2025.
5. Sector Concentration Within Funds
Several mutual funds entered 2025 with concentrated exposure to popular themes such as infrastructure, manufacturing, capital goods, and PSU-linked stocks. While these themes performed strongly earlier, they became vulnerable to profit-taking and cyclical slowdowns.
When multiple stocks within the same theme correct simultaneously, fund NAVs decline faster than headline indices, intensifying investor discomfort.
6. Behavioural Factors and Investor Psychology
Beyond economic reasons, psychology plays a major role in how investors perceive 2025.
Many new investors began investing during a bull market. For them, steady double-digit returns felt normal. When markets corrected, the emotional impact felt disproportionate, even if losses were within historical norms.
This behavioural gap between expectations and reality is a key reason why mutual funds are going down in 2025 feels particularly painful.
Why SIP Returns Look Weak in 2025
SIPs are designed to average market cycles, not eliminate short-term volatility. In 2025, SIP investors are seeing lower XIRR because:
- Recent instalments were invested near market highs
- Earlier gains are being averaged with lower recent returns
- Markets have moved sideways instead of trending upward
Historically, periods when SIP returns look disappointing have often preceded strong long-term outcomes, provided investors remain disciplined.
Category-Wise Mutual Fund Performance in 2025
Equity Mutual Funds
Equity mutual funds have shown mixed performance:
- Large-cap funds have delivered relative stability but modest returns
- Mid-cap and small-cap funds have corrected more sharply
- Funds focused on quality and diversification have performed better than thematic strategies
Equity mutual funds are not broken, but return expectations must adjust to realistic earnings growth.
Top Equity Mutual Funds in 2025
After meticulously analyzing the funds on several parameters, we’ve shortlisted the top 5 performing equity mutual funds in the last 10 years. Take a look:
| Name of Fund | Category | Expense Ratio | 10 Year Returns | AUM (INR Cr) |
| Nippon India Small Cap Fund | EQ-International | 0.58 | 22.10 | 11,241 |
| Invesco India Mid cap Fund | EQ-Multi Cap | 0.54 | 20.51 | 10,006 |
| Quant Infrastructure Fund | EQ-Infrastructure | 0.70 | 20.42 | 3,188 |
| Quant Flexi Cap Fund | EQ-Flexi Cap | 0.68 | 20.27 | 6,867 |
| DSP Natural Resources and New Energy Fund | EQ-Energy | 0.90 | 20.13 | 1,467 |
Data available is updated as of 12.12.25
Suggested Read: Which Equity Mutual Fund Thrilled Investors in 2023?
Debt Mutual Funds
Debt funds have struggled due to rising yields and duration risk. As bond prices fell, NAVs declined, affecting even conservative portfolios.
However, once interest rates stabilise or begin to decline, debt mutual funds historically tend to recover gradually, offering more predictable returns.
Top Debt Mutual Funds in 2025
After meticulously analyzing the funds on several parameters, we’ve shortlisted the top 5 performing debt mutual funds in the last 10 years. Take a look:
| Name of Fund | Category | Expense Ratio | 10 Year Returns | AUM (INR Cr) |
| ABSL Medium Term Fund | DT-Medium Duration | 0.82 | 9.31 | 2,864 |
| ABSL Credit Risk Fund | DT-Credit Risk | 0.80 | 9.17 | 1,094 |
| SBI Magnum Medium Duration Fund | DT-Medium Duration | 0.71 | 8.81 | 6,946 |
| ICICI Pru Credit Risk Fund | DT-Credit Risk | 0.76 | 8.67 | 5,936 |
| DSP Credit Risk Fund | DT-Credit Risk | 0.40 | 8.66 | 209 |
Data available is updated as of 12.12.25
Suggested Read: Debt Mutual Funds in 2025: Conquer Wealth, Beat FDs & RDs!
Hybrid Mutual Funds
Hybrid funds have regained relevance in 2025. By balancing equity and debt exposure, they help reduce volatility and emotional stress during uncertain market phases.
For investors finding it difficult to stay invested, hybrid funds have provided a smoother experience.
Top Hybrid Mutual Funds in 2025
After meticulously analyzing the funds on several parameters, we’ve shortlisted the top 5 performing hybrid mutual funds in the last 10 years. Take a look:
| Name of Fund | Category | Expense Ratio | 10 Year Returns | AUM (INR Cr) |
| Quant Multi Asset Allocation Fund | HY-Multi Asset Allocation | 0.67 | 18.75 | 4,182 |
| ICICI Pru Multi Asset Fund | HY-Multi Asset Allocation | 0.67 | 17.49 | 75,067 |
| ICICI Pru Equity & Debt Fund | HY-Hybrid Aggressive Fund | 0.93 | 17.37 | 49,223 |
| Quant Aggressive Hybrid Fund | HY-Hybrid Aggressive Fund | 0.78 | 16.89 | 2,110 |
| HDFC Balanced Advantage Fund | HY-Multi Asset Allocation | 0.73 | 15.54 | 1,07,971 |
Data available is updated as of 12.12.25
Suggested Read: Top 5 Hybrid Mutual Funds to invest in 2025: Achieve Growth with Balanced Risk
Should Investors Exit Mutual Funds or Stop SIPs in 2025?
This is the most critical decision point for investors.
Exiting mutual funds or stopping SIPs during corrections has historically resulted in:
- Missing early stages of recovery
- Lower long-term returns
- Emotion-driven decision-making
However, exits may be justified if:
- Financial goals or time horizons have changed
- A fund consistently underperforms its category and benchmark
- Portfolio allocation no longer aligns with risk tolerance
For most long-term investors, patience has proven more effective than prediction.
What Disciplined Investors Are Actually Doing During Mutual Funds Downfall in 2025
When mutual fund returns look dull and portfolios refuse to cooperate, the instinctive response is to do something. Check the app more often. Switch funds. Pause SIPs. Move to what “seems safer.”
Interestingly, the investors who have been through multiple market cycles are doing the opposite.
They are not trying to outsmart the market in 2025 or early 2026. They are trying to avoid sabotaging themselves.
Here’s what that looks like in practice:
They are continuing SIPs without interruption
Disciplined investors understand that SIPs are not meant to feel rewarding during corrections. In fact, SIPs often feel the most pointless right before they start working again.
When markets are volatile or moving sideways, SIP instalments quietly accumulate units at lower average prices. There is no visible excitement in the portfolio, but the foundation is being laid.
Instead of asking, “Why is my SIP not giving returns right now?”, experienced investors tend to ask a calmer question:
“Am I still investing regularly during the uncomfortable phase?”
That shift in mindset matters more than timing the next rally.
Suggested Read: What Is the Powerful 7-5-3-1 Rule in Mutual Funds SIP Investment?
They are avoiding frequent fund switches
One of the most common mistakes during uncertain phases is switching funds based on recent underperformance.
Disciplined investors recognise a pattern they have seen before:
- A fund underperforms during a correction
- Investors exit
- The same fund recovers once conditions improve
Switching too often converts temporary underperformance into permanent damage. Instead, experienced investors review funds less emotionally. They look at consistency, mandate adherence, and long-term behaviour, not just the last few quarters.
They understand that chasing yesterday’s winner rarely works in mutual funds.
Suggested Read: Can You Switch SIP to Lumpsum or SWP? Learn the Best Investment Move in 2025
They are rebalancing slowly, not reacting quickly
Rather than making sharp portfolio changes, disciplined investors rebalance gradually.
If equity exposure has fallen due to market corrections, they don’t rush to “fix” it in one move. Small, deliberate adjustments are preferred over big, emotional shifts.
This approach serves two purposes:
- It reduces regret if markets move unpredictably
- It keeps decision-making aligned with long-term asset allocation rather than short-term noise
- Rebalancing, for them, is a maintenance activity, not a rescue operation.
They are resetting expectations, not abandoning plans
Perhaps the most important thing disciplined investors are doing is resetting expectations.
They recognise that:
- Not every year delivers strong returns
- Flat or low-return years are part of the journey
- Long-term investing includes long stretches of boredom and discomfort
Instead of questioning the entire investment strategy, they accept that 2025 and the transition into 2026 are testing phases, not verdicts on mutual funds as an asset class.
A simple story that mirrors what’s happening now
Consider two investors, both starting SIPs in early 2021.
Investor A enjoyed strong returns in the first two years. When markets slowed in 2024 and returns looked weak in 2025, they paused SIPs, switched funds twice, and moved part of the money to cash, waiting for “clarity.”
Investor B also felt uncomfortable. Their portfolio did not look impressive either. But they continued SIPs, avoided switching funds impulsively, and made only small adjustments when required.
By the end of 2025, both portfolios looked similar. Nothing dramatic separated them yet.
The difference usually shows up later, not immediately.
When markets stabilise and returns normalise, Investor B has more units accumulated during the dull phase. Investor A, despite being more “active,” often ends up with lower long-term returns because key accumulation months were missed.
This is why seasoned investors say that market cycles reward behaviour more than intelligence.
The real test of this phase
What we are seeing in late 2025 and early 2026 is not a test of who can predict the market correctly. It is a test of who can stay consistent when results are uninspiring.
Disciplined investors are not confident because they know what will happen next. They are calm because they know how markets usually behave over full cycles.
This phase is not asking investors to be clever.
It is asking them to be patient.
Will Mutual Funds Make a Strong Comeback in 2026?
A “strong comeback” in mutual funds usually doesn’t arrive as a dramatic turning point. It tends to show up quietly, first in stabilising volatility, then in improving rolling returns, and only later in confident headlines. That pattern matters going into 2026 because late 2025 is ending with investors still processing a tough year.
What 2025 signals as we enter 2026
Domestic participation is still structurally strong.
Even after a choppy 2025, SIP behaviour has stayed resilient. AMFI-reported numbers for November 2025 show SIP contributions around ₹29,445 crore, while equity fund inflows were reported at ₹29,911 crore (month data cited by Mint from AMFI).
At the same time, the number of contributing SIP accounts was reported around 9.42 crore, and SIP AUM around ₹16.5 lakh crore in November 2025 (Economic Times citing AMFI data).
This matters because a comeback in mutual funds is easier when the domestic “base” stays engaged rather than disappearing after a down year.
Foreign selling has been a real headwind in 2025, and it’s still visible in December.
NSDL-linked reporting shows 2025 saw extremely heavy FPI equity selling, with net outflows cited at $18.4 billion (Economic Times referencing NSDL data).
Reuters also reported continued foreign outflows and market pressure in mid-December 2025, alongside the rupee hitting a record low.
If foreign flows stabilise in 2026, that alone can reduce volatility and improve the return environment for equity-oriented mutual funds.
Interest-rate direction is still one of the biggest “recovery levers”.
RBI’s October 2025 policy communication (via PIB) stated the repo rate was kept unchanged at 5.50% with a neutral stance and provided updated growth/inflation projections for FY2025-26.
If 2026 brings clearer evidence of easing inflation and policy room to cut rates, the tailwinds can appear in both equity valuations and parts of the debt-fund universe (especially longer-duration segments). This is not a forecast, but a well-observed mechanism.
What would a 2026 comeback likely look like in practice
Rather than expecting an immediate “V-shaped” rebound, a more realistic 2026 comeback pathway often looks like this:
- Volatility cools first (less violent drawdowns, fewer shock weeks).
- Breadth improves (more sectors participate instead of narrow leadership).
- Rolling returns recover (3-year rolling return curves improve before 1-year numbers look exciting).
- Investor behaviour stabilises (fewer SIP stoppages, more consistent net flows).
Bottom line for 2026
Going into 2026, the setup is not “guaranteed recovery.” But the building blocks that typically support a comeback are at least visible:
- Resilient SIP participation (AMFI-reported),
- Potential for improved macro clarity, including the interest-rate path (RBI/PIB),
- And the possibility that the extreme foreign-flow pressure of 2025 eases (NSDL-linked reporting, Reuters).
Suggested Read: How to Plan Your ELSS Investment for Financial Year 2025-2026
Bottom Line
If 2025 felt uncomfortable as a mutual fund investor, that feeling is valid. This year tested patience more than skill. It challenged expectations that were built during an unusually strong market phase and reminded investors that wealth creation is rarely smooth or linear.
What matters most, though, is perspective.
Mutual funds are not “broken” in 2025. They are behaving the way they often do when interest rates stay high, valuations reset, global capital moves cautiously, and sentiment turns defensive. These phases tend to feel longest and hardest when you are living through them, but in hindsight, they usually appear as normal pauses within much larger cycles.
As the calendar turns to 2026, the question is less about predicting the exact timing of a recovery and more about understanding behaviour. Market cycles do not reward constant action. They reward consistency, realistic expectations, and the ability to stay invested when outcomes feel uninspiring.
History suggests that recoveries rarely begin with confidence or clarity. They often start quietly, while investors are still focused on what went wrong. That is why this phase should be viewed less as a verdict on mutual funds and more as a transition.
In the long run, markets tend to reward patience far more reliably than prediction.
Disclaimer: Investments in the securities market are subject to market risks, read all the related documents carefully before investing. The securities are quoted as an example and not as a recommendation.
FAQs
Is it good to invest in mutual funds in 2025?
For long-term investors, 2025 can still be a reasonable time to invest in mutual funds, provided expectations are realistic. Markets have been volatile due to high interest rates and global uncertainty, which affects short-term returns. However, historically, investments made during uncertain phases often benefit when market cycles turn favourable over time.
Why are all mutual funds going down?
It may feel like all mutual funds are going down, but this usually happens when multiple factors hit markets together. High interest rates, foreign investor selling, and valuation corrections have impacted both equity and debt funds in 2025. Since most funds are linked to broader markets, short-term declines can appear widespread even when fundamentals remain intact.
Which mutual fund is best in 2026?
There is no single “best” mutual fund for 2026, as suitability depends on an investor’s goals, time horizon, and risk tolerance. Instead of chasing top performers, investors are generally better off choosing funds with consistent long-term performance, clear investment strategy, and alignment with their financial objectives, while remaining prepared for market fluctuations.
Which sector will boom in 2026 in India?
Predicting a guaranteed sector “boom” in 2026 is not realistic. However, sectors aligned with long-term policy support and economic priorities, such as infrastructure, capital expenditure, and domestic consumption, are often discussed as having structural tailwinds. Rather than betting on one sector, many investors prefer diversified exposure to manage risks more effectively.
