Understanding the numbers: What Equity & Hybrid Fund Managers Are Actually Doing

Sectoral holding data across equity and hybrid funds reveals distinct patterns of conviction, rotation, and caution that carry important implications for portfolio decisions.

Part A: Observations from Equity Mutual Fund Holdings (March 2025 – January 2026)

1. Banks Remain the Unshakeable Core

The average holding of equity mutuals funds in the banking sector is at 22.87% as of Jan’26, up by 0.4% from Mar’25 levels. Importantly, this allocation has held firm and signals consistency in fund managers conviction, backed by a thesis around a strengthening domestic credit cycle and clean balance sheets across the sector. Another reason for higher holding in this sector is to avoid significant deviation from Nifty-based benchmarks, particularly for large-cap heavy schemes (since Nifty has high bank weightage).

2. Automobiles: The Tactical Winner

The Automobile sector emerged as the most significant gainer, as average holding of equity MFs in the sector rose by 1.42% during Mar’25 to Jan’26. This is a meaningful shift for an industry that struggled through multi-year headwinds and reflects fund managers' strong belief in a domestic consumption recovery, coupled with excitement around the EV transition, premiumisation in the auto segment, and supply chain normalisation.

3. Strategic Pruning in IT and Pharma

In a noteworthy tactical pivot, two traditionally 'safe' sectors — Pharmaceuticals and IT-Software have seen sharp reductions in average holding by 70-100bps each.

Pharmaceuticals fell by 1.08%, signalling caution around valuation and possible earnings moderation in global generic markets.

IT-Software declined by 0.72%, reflecting uncertainty around global technology spend, particularly in the US market, as clients of Indian IT companies defer discretionary projects.

This trimming is not abandonment but tactical rebalancing. Fund managers are locking in gains in sectors that had run up significantly and redeploying capital into relatively better-valued domestic themes.

The AI-fear may have resulted in further trimming post January 2026, not reflected in the data.

4. Emerging Interest in Financial Services & E-Commerce

Beyond traditional banking, there is a growing allocation toward broader Financial Services and the nascent but rapidly growing E-Commerce theme. This indicates that fund managers are looking ahead at India's digital consumption story as a multi-year opportunity.

Part B: Observations from Hybrid Mutual Fund Holdings (March 2025 – January 2026)

Hybrid fund managers operate within a dual mandate of balancing growth with income stability. Their sectoral choices, therefore, carry an additional layer of nuance compared to pure equity funds.

1. A Shift Toward Yield-Generating Assets

The most striking trend in hybrid fund holdings is the aggressive increase in holdings of income-generating instruments like REITs and InvITs.

Hybrid MFs held negligible portion of REITs in Mar’25; however, their average holdings in REITs have jumped to ~2% in Jan’26, signalling hybrid managers' preference for predictable, cash-flow-backed returns.

Similarly, hybrid MFs have also increased their average holding of InvITs by 0.7% during the same period, further reinforcing the preference for yield visibility over pure capital appreciation.

This is a material shift as hybrid fund managers are effectively telling us that in the current interest rate environment, quality yield is becoming scarce and worth paying a premium for. This may also be driven by change in classification of REITs and InvITs per recent SEBI amendments (providing equity-like classification for REITs and InvITs).

2. Banks: The Dominant and Growing Pillar

In hybrid portfolios too, fund managers have increased average holdings in banks meaningfully to 15.14% in Jan’26, from 13.29% in Mar’25. This confirms that across fund categories, the Indian banking sector is being viewed as the primary engine of both stability and growth.

3. De-risking from Global-Facing Themes

Hybrid funds are actively reducing exposure to sectors sensitive to global macro pressures.

Refineries saw the steepest decline in average holding by 0.95%, reflecting caution around global crude price volatility and the energy transition away from fossil fuels.

Similarly, IT-Software holding also declined by 0.88%, consistent with the equity fund trend and reflecting concerns around global IT spending discretion.

Hybrid managers are reducing exposure where global uncertainty is elevated and redirecting capital toward domestic, income-generating themes.