Mutual Fund AUM hits Rs 81 lakh crore, but why did investor returns diverge sharply in 2025?

India’s mutual fund industry ended 2025 on a historic note, with assets under management (AUM) touching a record Rs 81 lakh crore. Strong retail participation, steady SIP inflows and supportive market conditions helped the industry add nearly Rs 14 lakh crore in net inflows during the year, including close to Rs 3 lakh crore through SIPs alone. According to data from the Association of Mutual Funds in India (AMFI) available till November 2025, around 3.36 crore new investors entered the mutual fund ecosystem, highlighting the deepening penetration of market-linked products across Indian households.

However, behind these headline numbers lay a more nuanced reality. Despite similar levels of participation, investor experiences through 2025 varied sharply, driven by widening return dispersion across funds, asset classes and portfolios. In an interaction with Business Today, Niharika Tripathi, Head of Products & Research at Wealthy.in, explains why record AUM growth did not translate into uniform investor outcomes and what key lessons investors should take away from 2025.

Q: Why did record mutual fund AUM not translate into consistent investor outcomes in 2025?

Niharika Tripathi: In 2025, the mutual fund industry crossed a major milestone as AUM surpassed ₹80 lakh crore in India. However, it is important to remember that AUM reflects the total market value of assets managed by funds—it does not automatically mean that every investor earned consistent or positive returns.

The industry’s growth was driven by a combination of fresh inflows and market appreciation, but individual outcomes diverged significantly due to entry timing, behavioural factors and shifts within the market. Many investors entered equities in late 2024 or early 2025, when valuations were already elevated. Even if a fund’s AUM grew by 20% during the year, an investor who entered near the peak could have seen flat or even negative returns by December, while long-term investors benefited from the full growth cycle.

Outcomes also varied sharply based on portfolio composition. Investors with heavy exposure to sectoral or thematic funds that underperformed in 2025 had very different experiences compared to those who allocated meaningfully to hybrid categories such as multi-asset allocation funds.

Q: How did return dispersion emerge as the defining feature of 2025?

Niharika Tripathi: While headline indices like the Nifty 50 and Sensex touched new all-time highs in 2025, there was a significant gap between index-level performance and individual portfolio returns. The rally was driven by a narrow set of heavyweight stocks rather than the broader market. In fact, more than 70% of listed stocks were trading well below their 52-week highs.

Return dispersion was particularly evident at the sector level. Being positioned in the “wrong” sector in 2025 resulted in meaningful losses, regardless of the broader market trend. The rally was largely led by PSU banks, metals and automobiles, while sectors such as IT, energy, power, real estate and media saw deep corrections.

This divergence was also visible across market capitalisation. The Nifty Smallcap 250 declined by over 7% during the year, even as the Nifty 50 gained more than 10%. Many stocks within the Nifty 500 were overvalued, prompting institutional investors to rotate capital into large-cap stocks with stronger balance sheets. Unlike a market crash or a broad-based bull run, return dispersion is a stealth trend—and in 2025, it effectively ended the 2023-24 phase where a rising tide lifted all boats. Investors were reminded that price is what you pay, but value and earnings are what you earn.

Q: Why did asset allocation matter more than fund or stock selection in 2025?

Niharika Tripathi: Asset allocation emerged as the dominant driver of outcomes in 2025, overshadowing both fund and stock selection. Extreme category dispersion and heightened volatility meant that diversified asset mixes performed better than aggressive, concentrated equity bets.

Large-cap funds outperformed after sharp corrections in mid- and small-cap segments, rewarding portfolios that blended equity with debt and gold. Multi-asset allocation funds topped performance charts due to dynamic rebalancing and built-in diversification, while small-cap strategies showed high dispersion.

Importantly, diversification within equities alone did not solve the problem. A majority of Nifty 500 companies failed to deliver positive returns, so holding multiple equity categories did not necessarily reduce risk. Portfolios that diversified across asset classes—equity, debt and commodities—and periodically reassessed this allocation delivered more stable and superior outcomes.

Q: How did delayed rebalancing lead to risk drift in many portfolios?

Niharika Tripathi: When rebalancing is delayed, a portfolio stops reflecting the investor’s original plan and starts reflecting recent market performance. This risk drift occurs because different asset classes grow at different speeds.

In India, this was amplified in 2025 as small- and mid-caps underperformed large-caps and debt. Gold rallied strongly, fixed income benefited from yield movements, and equity leadership shifted sharply. Investors who delayed rebalancing—often due to fear of taxes or transaction costs—ended up with unintended risk exposures.

Many investors held on to overvalued equities to avoid long-term capital gains tax, unknowingly accepting the risk of a sharp 20–30% correction later. This “tax-loss myopia” is a major driver of delayed rebalancing in India. By the time volatility rose in late 2025, several ‘moderate’ investors had effectively become ‘aggressive’ without realising it. Recency bias, especially the belief that small caps would continue performing as they did in 2023–24, also played a role.

Q: Why did debt and gold contribute more to stability than expected, yet remain under-allocated?

Niharika Tripathi: The period between 2024 and 2025 was a wake-up call for asset allocation. While investors chased mid- and small-cap returns, debt and gold quietly provided stability during volatile phases.

In 2025, while the Nifty 50 delivered around 10–11%, gold surged nearly 70% in domestic terms, driven by a weakening rupee, geopolitical tensions and central bank buying. Debt markets also performed well as RBI rate easing and falling yields supported longer-duration funds, which delivered stable 7–8% returns with low dispersion.

Despite this, most retail portfolios still hold less than 5% in paper gold through ETFs or SGBs. Many investors count jewellery as gold allocation, but it is neither liquid nor efficient for rebalancing. Behavioural inertia and equity optimism from previous bull runs led investors to under-allocate to debt and gold, even as these assets proved to be effective shock absorbers.

Q: What portfolio-level signals should investors focus on beyond category averages?

Niharika Tripathi: Portfolio-level metrics provide far more meaningful insights than category averages or headline returns. Risk-adjusted measures such as Sharpe and Sortino ratios, maximum drawdowns, volatility and correlations show how a portfolio behaves under stress and whether it aligns with an investor’s goals.

A fund may post high absolute returns, but a poor Sharpe ratio indicates inefficient risk-taking. Maximum drawdown is critical for survival, while beta and R-squared help assess diversification. In years like 2025, portfolio correlations mattered more than individual returns, as high overlap amplified losses. Investors who tracked these signals were better equipped to manage risk and stay disciplined.