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Sectoral Mutual Funds Show Sharp Two-Year Performance Divide
Different parts of the stock market performed very differently over the past two years.
Defence stocks had the best reported return, followed by metals and public-sector banks.
Technology, consumer, media and real-estate sectors lost value.
A sectoral mutual fund invests mostly in one part of the economy, so its result depends heavily on that sector.
Defence stocks benefited from better earnings and higher valuations.
Metals had very strong earnings growth, but their valuations fell, limiting returns.
Some weaker sectors suffered because their previously high valuations declined.
Investors were advised to compare a sector’s price with its expected long-term growth.
The analyst specifically urged caution about technology, media and consumption-related sectors.
Defence, metals and PSU banks delivered the strongest two-year sector returns, at 19%, 14% and 10% CAGR, respectively.
Technology, consumer, media and real estate were the weakest sectors, returning -18%, -17%, -15% and -12%.
Motilal Oswal Financial Services said sector performance diverged sharply despite the broader market remaining range-bound and below its September 2024 peak.
Defence returns reflected earnings growth and a higher price-to-earnings valuation, while PSU banks benefited mainly from stronger earnings.
Investors were advised to assess fair valuations and long-term growth, while remaining cautious about technology, media and high-valuation consumption sectors.
- Who
- Investors in sectoral mutual funds, Motilal Oswal Financial Services, and Vikas Gupta of Omniscience Capital.
- What
- Sectoral returns varied sharply over two years, with defence and metals outperforming while technology and consumer sectors declined.
- Where
- Across sectors in the Indian market.
- When
- The comparison covers the two years ending 25 September 2026.
- Why
- Returns differed because of changes in sector earnings growth and price-to-earnings valuations.
Opportunities in Undervalued Sectors
Risks in Uncertain or Expensive Sectors
Sector allocation
Opportunities in Undervalued Sectors
Vikas Gupta suggested considering sectors that appear undervalued relative to their long-term growth expectations, while noting that earnings forecasts are positive for most non-cyclical sectors.
Risks in Uncertain or Expensive Sectors
Investors should be cautious because sectoral funds are concentrated and can be hurt when valuations decline or earnings are difficult to forecast.
Technology and consumption
Opportunities in Undervalued Sectors
Positive earnings forecasts in many sectors could create opportunities if valuations become more reasonable.
Risks in Uncertain or Expensive Sectors
Gupta specifically cautioned against technology because future revenue and earnings are uncertain, and against consumption-related sectors because their price-to-earnings ratios remain high relative to expected growth.
Key facts
- Best-performing sector
- Defence: 19% two-year CAGR
- Other outperformers
- Metals: 14%; PSU Banks: 10%
- Weakest-performing sector
- Technology: -18% two-year CAGR
- Other laggards
- Consumer: -17%; Media: -15%; Real Estate: -12%
- Defence valuation change
- The sector’s price-to-earnings multiple rose from the mid-40s to the mid-50s
- Metals earnings
- Earnings more than doubled over two years, while the price-to-earnings multiple fell from nearly 30 to around 15
- Investor guidance
- Assess fair price-to-earnings valuations and long-term growth; exercise caution with technology, media and consumption-related sectors
Quotes
Vikas Gupta
CEO and strategist at Omniscience Capital
“For most of the others showing negative returns, it is mostly PEs being very high in 2024 and the PE de-rating which has given negative returns. Whatever earnings growth these sectors might have had was cancelled by the PE de-ratings.”
livemint.com
“Similarly, media remains a concern. On consumption-related sectors, caution is warranted given the still very high PE ratios compared to the expected growth rate of the sector.”
livemint.com
Sources
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