Indian mutual fund managers are reshaping their equity portfolios, with capital goods and healthcare emerging among the sectors attracting greater exposure as domestic institutions navigate market volatility and changing sector opportunities.
According to data compiled by Motilal Oswal Financial Services (MOFSL) in its June 2026 Fund Folio report, domestic mutual funds increased their exposure to areas including capital goods and healthcare during May, while allocations to oil & gas, PSU banks and some technology exposure were reduced.
The portfolio changes came during a period when foreign institutional investors were pulling money out of Indian equities while domestic mutual funds remained significant buyers.
The shift offers an important window into where professional fund managers were finding opportunities—but it should not automatically be interpreted as a prediction that those sectors will outperform.
Capital Goods and Healthcare Attract Fund Managers
Capital goods emerged as one of the sectors gaining attention from domestic mutual funds.
That positioning is notable because capital-goods businesses can be linked to India's broader investment cycle, including manufacturing, industrial expansion and infrastructure spending.
Healthcare also gained exposure.
Unlike highly cyclical industries, healthcare can offer exposure to businesses driven by pharmaceutical demand, hospitals, diagnostics and other healthcare services. However, individual companies within the sector can face very different growth, regulatory and valuation conditions.
The combination suggests fund managers were not concentrating exclusively on one investment theme. Instead, portfolios showed exposure to both investment-cycle opportunities and healthcare businesses.
Domestic Mutual Funds Counter Foreign Selling
The sector reshuffle occurred against an important backdrop in India's equity market.
Data cited from the MOFSL report showed foreign institutional investors pulling out approximately $4.9 billion, while domestic mutual funds recorded inflows of about $8.7 billion during the period examined.
That contrast demonstrates the growing influence of domestic institutional money in Indian equities.
Foreign and domestic investors do not necessarily respond to the same factors at the same time. Global investors can be affected by international interest rates, currency movements, global risk appetite and allocations across emerging markets.
Domestic mutual funds, meanwhile, receive money from Indian investors through routes including systematic investment plans and lump-sum investments.
Oil & Gas and PSU Banks Lose Some Weight
The portfolio shift was not only about where fund managers added exposure.
Mutual funds also reduced allocations to oil & gas, PSU banks and selected technology stocks, according to the report.
A reduction in portfolio weight does not necessarily mean fund managers have turned fundamentally bearish on an entire industry.
Sector weights can change for several reasons, including stock-price movements, valuations, profit booking, risk management, new investment opportunities and changes in individual company positions.
Therefore, the data is better viewed as evidence of portfolio rotation rather than a definitive verdict on the sectors being reduced.
Why Capital Goods Remain on Investors' Radar
The capital-goods sector has become closely associated with India's investment and manufacturing cycle.
Companies operating in the space can benefit when businesses expand capacity, governments increase infrastructure investment and demand rises for industrial equipment, electrical systems, engineering products and manufacturing technology.
That gives fund managers a potential way to participate in India's capital-expenditure story.
However, capital-goods companies are also sensitive to execution, order flows, economic cycles and valuations. Strong industry prospects do not automatically translate into attractive returns from every stock.
Healthcare Offers a Different Investment Theme
Healthcare provides a different set of characteristics.
India has a large pharmaceutical manufacturing base alongside expanding hospital, diagnostics and healthcare-services businesses.
For diversified mutual funds, healthcare can therefore provide exposure to a sector whose earnings drivers may differ from banks, industrial companies or commodity-linked businesses.
Recent fund-level disclosures also show healthcare remaining a meaningful allocation in several portfolios. For example, healthcare represented 12.36% of the Motilal Oswal Infrastructure Fund's portfolio as of August 31, 2026, while capital goods accounted for 28.96%. These figures refer to that specific fund and should not be treated as industry-wide allocations.
The Bigger Mutual Fund Story Has Strengthened
The broader Indian mutual fund industry has continued expanding since the May sector-rotation data.
In August 2026, equity mutual fund inflows climbed 18.8% month-on-month to ₹29,329 crore, according to AMFI data reported by Reuters.
Systematic investment plan contributions reached a record ₹32,297 crore during August.
Small-cap funds attracted around ₹7,973 crore, while mid-cap schemes received approximately ₹6,989 crore. Large-cap funds, by contrast, recorded net outflows of roughly ₹1,147 crore.
These newer figures do not prove that the May sector preferences continued unchanged into August. They do, however, show that domestic investor money has continued flowing strongly into the mutual fund system.
What the Sector Rotation Actually Tells Investors
Sector-allocation changes can provide valuable clues about professional investors' positioning, but they require careful interpretation.
An increase in healthcare or capital-goods exposure does not mean every mutual fund is buying those sectors, nor does it guarantee that stocks in those industries will rise.
Similarly, lower allocation to oil & gas or PSU banks should not automatically be treated as a sell signal.
Mutual fund portfolios vary according to investment mandate, market-cap focus, valuation discipline and individual fund-manager strategy.
For retail investors, the more important takeaway is that institutional portfolios are dynamic. Fund managers continuously reassess valuations, earnings prospects and risk rather than maintaining fixed sector allocations.
Domestic Money Is Becoming Increasingly Important
Perhaps the bigger story behind the sector changes is the growing role of domestic capital in India's stock market.
Even when foreign investors turn cautious, persistent mutual fund participation can provide a significant domestic source of equity demand.
The latest AMFI numbers reinforce that trend. Equity-oriented funds have now recorded net inflows for 66 consecutive months, while SIP contributions continue to reach new highs.
That does not eliminate market risk, but it shows how India's expanding base of domestic mutual fund investors is changing the structure of equity-market flows.
What to Watch Next
Investors should now watch whether the preference for healthcare and capital goods persists in subsequent portfolio disclosures or gives way to another round of sector rotation.
Three factors will be particularly relevant: corporate earnings, valuations and the strength of India's investment cycle.
For healthcare, company-specific earnings and regulatory developments will remain important. For capital goods, order books, infrastructure spending, manufacturing investment and execution will be key indicators.
The May data provides a snapshot of where fund managers were positioning money—not a permanent investment roadmap.
But combined with continued strong domestic mutual fund inflows, it highlights a broader trend: Indian fund managers are actively reallocating capital as they search for opportunities across an increasingly volatile market.
