Where Are Equity Fund Managers Investing In 2026? Morningstar Explains

The Indian equity market may have ended 2025 in the green, but the path was anything but steady. According to a report titled, “Starting 2026 on the Right Foot-India” by Himanshu Srivastava, Principal Research, Morningstar Investment Research India, “domestic drivers such as sustained government-led infrastructure spending, a pickup in domestic consumption, continued capital-expenditure revival by corporates, and earnings growth across key sectors supported investor confidence.”

Yet global realities kept interrupting the rally. The report notes that “fast-evolving global trade dynamics, persistent geopolitical tensions, and concerns around slowing global growth introduced bouts of volatility.” These pressures triggered periodic corrections even as headline indices like the Sensex and Nifty finished higher.

Himanshu Srivastava highlights that one structural shift stood out: “A defining feature of 2025 was the growing role of domestic investors.” Strong SIP flows, steady retail participation and domestic institutional buying cushioned markets despite foreign outflows.

Large caps are back in favour

One of the clearest portfolio trends going into 2026 is a tilt toward stability. The study points out, “There was a divergence in the performance of market segments compared with the previous year, with large cap indexes outperforming mid and small cap segments.”

Fund managers appear to be responding pragmatically. “This positioning reflects a balanced and calibrated approach, using large caps for stability while selectively allocating to mid and small caps for incremental alpha.” In other words, large caps form the anchor, while selective mid and small-cap bets are meant to add returns without materially raising risk, the study notes.

Sector calls show selective conviction

According to the study, portfolio allocations reveal a clear preference for sectors tied closely to domestic growth visibility. Financial services remain core holdings, though positioning ranges from neutral to mildly underweight because of margin and asset-quality worries. Insurance, however, is relatively better supported due to structural growth potential, says the study.

Consumer cyclicals, as per the study, are a popular overweight theme, driven by expectations of improving discretionary demand. Autos, retail, durables and travel-related segments are also among the preferred plays as managers position for a consumption recovery. Healthcare also features prominently across portfolios, offering what the report describes as a mix of defensiveness and structural tailwinds.

Caution where visibility is weak

Not all sectors inspire the same confidence. The report states plainly: “Technology remains underweight across several portfolios and was among the weaker-performing sectors in 2025.” Slower global tech spending, pricing pressure and macro uncertainty have limited fresh allocations despite the sector’s long-term relevance.

Industrials, on the other hand, notes the study, continue to attract overweight exposure, supported by government spending on infrastructure, defence and manufacturing. Still, even here, allocations are measured given valuation concerns and execution risks. Basic materials remain modestly underweight because earnings are closely tied to global commodity cycles and volatile costs.

To sum up, Morningstar’s analysis shows that fund managers are entering 2026 with a cautiously constructive stance. The funds are keeping large caps at the core. And, they are staying selective where valuations or global linkages raise uncertainty. Equity fund managers. As per the study, they are leaning on domestic growth stories.