Core Insights - Active management in short-term bonds has historically delivered returns 25% higher than passive strategies, particularly in the context of geopolitical volatility and inflation concerns in 2026 [1] - The ICE/BAML Global 1-5 Year Investment Grade Index currently yields around 4.33%, suggesting potential annual returns exceeding 5% for actively managed strategies [1] - Active bond ETFs saw record inflows of $56 billion in January, with $27 billion going into active strategies, indicating a significant shift in investor preference towards active management [1] Active Management Advantages - Active managers can achieve superior returns through strategic sector selection and "roll-down" gains as bonds approach maturity [1] - The defensive quality of active management was highlighted in 2025, where the index returned 5.49% despite challenges faced by longer-term bonds [1] - Selectivity in investment is crucial in a volatile market, with active strategies avoiding sectors like auto companies and commercial real estate that are facing rising issues [1] ETF Market Dynamics - The structure of ETFs has evolved into the "default launch vehicle" for new strategies, with active ETF assets increasing from $255 billion in 2020 to $1.3 trillion today [1] - Credit-related bond ETFs attracted $11 billion in January, reflecting a preference for targeted exposure over broad index holdings [1] - If the current pace of active bond ETF inflows continues, total assets could exceed $2 trillion, indicating a long-term shift in investment strategy [1]

Core Insights - The year 2025 presented a mixed experience for Indian mutual fund investors, with returns varying significantly across different fund categories, ranging from –20% to 178% [1] - Equity performance was notably divergent, with large-cap funds showing resilience while small-cap strategies faced challenges due to increased volatility [1] - Thematic funds reflected sector-specific cycles rather than overall market trends, while debt funds experienced diminishing returns as the year progressed [1] Equity Funds - The Nifty 500 index saw a sharp correction after peaking in September 2024, followed by a V-shaped recovery, with the Nifty 100 Total Return Index gaining about 10% YTD by December 23, 2025 [4] - Large-cap funds led returns with 7.5%, while mid-cap and small-cap funds lagged at 2.4% and –4.1% respectively, contrasting sharply with 2024's performance [6] - Systematic Investment Plans (SIPs) showed strong performance, with large-cap funds achieving an XIRR of 13.4% [7] Sector and Thematic Funds - Transportation and Banks & Financial Services sectors led returns at 18% and 16% respectively, while defensive sectors like Technology and Pharma underperformed [10] - Large-cap funds managed corrections better during market troughs, with declines of less than 9% compared to larger drops in flexi-cap and small-cap funds [12] Debt Funds - The RBI cut the repo rate by 125 bps to 5.25%, supported by low inflation, allowing for a favorable environment for debt funds [21] - G-Sec yields softened initially but later increased due to supply pressures, with long-duration funds posting modest YTD returns of 2.9% to 5.3% by December 23, 2025 [22] - The overall debt fund universe recorded a notable AUM increase of 23%, reaching ₹19.4 lakh crore by November 2025 [25] Gold and Silver ETFs - Gold and silver ETFs were standout performers, with silver surging 178% and gold returning 78% YTD [26] - Trading volumes for silver ETFs significantly outpaced gold ETFs, with total traded value for silver ETFs reaching ₹1.3 lakh crore, a 560% increase from the previous year [29] Hybrid Funds - Multi-asset allocation funds emerged as top performers with an average return of about 16.4%, benefiting from diversified exposure [31] - Aggressive hybrid funds delivered modest returns of around 5.7%, with significant performance dispersion among schemes [33] - Investor flows favored multi-asset allocation funds, which attracted the highest inflows at ₹39,631 crore [35] International Funds - International funds showed a wide range of returns from 9% to 178%, with US equity funds being the backbone of allocations [36] - The DSP World Gold Mining Overseas Equity Omni FoF achieved an extraordinary 178% return, driven by a rally in gold prices [39] - Regulatory constraints on overseas investments by Indian mutual funds limit incremental flows, impacting subscription opportunities [42][43]