Mutual fund returns 2026: Pharma, small-cap funds outperform as last year's winners stumble

After rewarding investors handsomely in 2025, several of last year's best-performing mutual fund categories have struggled to maintain their momentum in 2026, underlining how quickly market leadership can change.

An analysis by Value Research of category-wise mutual fund returns through July shows that six of the seven major fund categories have seen their performance rankings reverse from last year. While silver, banking and technology funds have lost ground, pharma, small-cap and international equity funds have emerged among this year's top performers.

The shift comes after a volatile first seven months of the year, marked by a sharp correction in February and March followed by an equally strong rebound in April, leaving many diversified equity funds with only modest gains despite significant intra-year swings.

Pharma and small-cap funds replace last year's top performers

According to Value Research, silver funds, the biggest wealth creators of 2025 with returns of 158.1%, have declined 5% so far this year. Gold funds, which gained 73.8% in 2025, have delivered a comparatively muted 6.3% in 2026.

Banking sector funds have slipped 2% after returning 18.9% last year, while technology funds have continued to struggle, falling 13.2% this year despite staging a sharp recovery in July.

Meanwhile, categories that disappointed investors in 2025 have staged an impressive comeback.

Pharma funds have emerged as the best-performing category with 16.4% returns after declining 2.9% in 2025. Small-cap funds have also rebounded sharply, gaining 9.7% after posting negative returns last year. International equity funds remain one of the few categories to deliver strong returns in consecutive years, rising 15.2% after a 30.2% gain in 2025.

"The belief that yesterday's winners will continue to be tomorrow's winners is one of the biggest misconceptions in mutual fund investing," said Debasish Mohanty, Chief Strategy Officer, The Wealth Company Mutual Fund.

According to Mohanty, investors often end up buying funds after a rally has already played out. Since markets move in cycles and fund leadership changes across different phases, repeatedly shifting to the latest outperformers can result in buying high, selling low and weakening the benefits of long-term compounding.

Volatility highlights the risks of chasing returns

The headline numbers mask the sharp volatility witnessed this year.

Value Research's analysis shows technology funds plunged 16.7% in February as global artificial intelligence stocks corrected. The sell-off intensified in March, with large-cap funds falling 11.6%, mid-cap funds 10.7% and small-cap funds 9.7% during the month.

The recovery was equally swift. In April, small-cap funds surged 16.1%, mid-cap funds gained 12.8%, while large-cap funds rose 9.3%, helping erase much of the earlier losses.

Despite these swings, diversified equity categories have posted muted returns. Flexi-cap funds are up just 0.6% this year, while large-cap funds have declined 2.6% and ELSS funds are down 0.9%, according to Value Research.

Jasmeet Singh, Executive Director at Anand Rathi Wealth Limited, said investors often assume that top-performing funds will continue to dominate, but market leadership rarely remains constant.

"Different sectors, investment styles and market-cap segments outperform at different stages of the market cycle," Singh said. He pointed to small-cap funds as an example, noting that none of the funds that ranked among the top performers in FY21 retained their position by FY25, while four of the five worst-performing funds from FY21 later moved into the top-performing group.

He said investors should remain focused on their long-term asset allocation and continue investing consistently rather than chasing recent winners.

The findings reinforce a key investing lesson that recent outperformance is not a reliable indicator of future returns. Instead of rotating portfolios based on the latest leaderboard, investors may be better served by maintaining diversification and periodically rebalancing their portfolios in line with their long-term financial goals.