Mutual funds in 2026: core portfolio or becoming commoditised?

The mutual fund industry in India crossed Rs. 70 lakh crore in assets under management earlier this year. SIP inflows have held above Rs. 25,000 crore a month for several consecutive months. By most measures, the industry is in the middle of its strongest period of retail adoption since it was deregulated.

And yet, a genuine question is circulating in wealth management conversations that would have seemed odd five years ago. Are mutual funds becoming too commoditised to justify the attention they receive in a sophisticated portfolio? It is worth engaging with that question honestly rather than dismissing it.

What commoditisation actually means here

Commoditisation in financial products happens when the differences between competing offerings become small enough that price becomes the dominant selection criterion. In equity mutual funds, this process is well advanced in certain categories.

Large-cap funds are the clearest example. SEBI's categorisation norms, introduced in 2017, required large-cap funds to invest at least 80 per cent of their corpus in the top 100 stocks by market capitalisation. The effect, visible clearly by now, is that most large-cap funds hold broadly similar portfolios. The top 20 holdings across competing funds overlap significantly. Return differences between managers in this category are narrow and inconsistent over time.

In that environment, a low-cost index fund tracking the Nifty 50 or the Nifty 100 does what active large-cap funds promise but frequently fail to deliver after fees. The data on this has been consistent enough over long enough periods that it is difficult to argue seriously against it. For the large-cap sleeve of a portfolio, active management has largely lost the debate.

The commoditisation question gets more complicated as you move away from large caps. Mid-cap and small-cap active funds have shown more persistent dispersion in returns, meaning manager selection matters more in these categories. Flexi-cap and focused funds retain genuine room for differentiation. Thematic and sectoral funds offer exposure that index products cannot replicate. So commoditisation is real, but it is not uniform across the product range.

Where mutual funds still earn their place

Dismissing mutual funds as commoditised misses what they actually do well, which is considerable.

Liquidity is underrated until it is needed. A mutual fund unit can be redeemed and settled within one to two business days. No AIF can offer that. No PMS account can be liquidated that quickly across all positions without market impact. For the portion of a portfolio that needs to remain accessible, mutual funds are structurally superior to every alternative.

The tax efficiency of equity mutual funds held for more than a year is meaningful. Long-term capital gains above Rs. 1.25 lakh are taxed at 12.5 per cent. Compare that to the tax drag in a PMS account, where every rebalancing trade is a taxable event, and the after-tax return difference in favour of mutual funds can be significant over a full investment cycle.

Debt mutual funds, despite the tax changes of recent years, still offer professional credit management, diversification across issuers, and liquidity that fixed deposits and direct bonds cannot match for most retail and HNI investors. Short-duration funds, corporate bond funds, and gilt funds each serve specific purposes in a portfolio that no other product replicates as cleanly.

Systematic investing through SIPs enforces a discipline that lump sum investing in PMS or AIF does not. For investors still in the wealth accumulation phase rather than the wealth management phase, the SIP mechanism in mutual funds is genuinely valuable.

The real competition is not with PMS or AIF

Here is something that often gets lost in the mutual fund versus alternatives debate. The most consequential competition for mutual funds in 2026 is not PMS or AIF. It is passive products within the mutual fund universe itself.

Index funds and ETFs have grown sharply as a proportion of industry AUM. The shift from active to passive in large-cap equity is well underway. Factor-based index funds, smart beta products, and low-cost international ETFs are expanding the passive universe further.

This internal competition is more disruptive to active mutual fund managers than the growth of PMS or AIF, because it happens at the same ticket sizes, with the same tax treatment, and within the same regulatory framework. An investor choosing between an active large-cap fund at a 1.5 per cent expense ratio and a Nifty 50 index fund at 0.1 per cent is making a decision entirely within the mutual fund category, and increasingly they are choosing the cheaper option.

Active fund managers who cannot demonstrate consistent, genuine alpha over a full market cycle are going to find this pressure intensifying. The ones who survive this period with strong client retention will be those running genuinely differentiated strategies in categories where active management still adds value.

How sophisticated portfolios are using mutual funds in 2026

The shift in how family offices and large HNIs use mutual funds is instructive. They are not abandoning the category. They are using it more precisely.

Mutual funds in sophisticated portfolios today tend to serve specific roles:

• Passive large-cap index funds as the low-cost equity core
• Mid and small-cap active funds where manager selection can add value
• Arbitrage funds for short-term surplus parking with equity taxation treatment
• Liquid and overnight funds for cash management within the overall portfolio
• International fund of funds for global equity exposure within the LRS framework

What they are not using mutual funds for is differentiated, concentrated equity exposure or access to private markets. Those needs are met by PMS and AIF, respectively. The portfolio architecture is layered rather than competitive.

Conclusion

Mutual funds in 2026 are neither the complete answer to a sophisticated investor's needs nor a category that deserves to be marginalised in favour of alternatives. The commoditisation concern is legitimate in specific segments, particularly active large-cap funds that have struggled to justify their fees against passive alternatives over time.

The honest assessment is that mutual funds remain the most efficient tool for liquidity management, systematic wealth accumulation, and low-cost passive equity exposure. Where they are being displaced, it is by better-suited products for specific purposes, not by superior versions of the same thing. A portfolio that understands this distinction and allocates accordingly will use mutual funds where they genuinely belong and look elsewhere where they do not.