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Mutual funds have always been one of the most popular investment choices for retail investors. They offer diversification, professional management, and exposure to multiple sectors with relatively lower effort compared to direct stock investing. However, not all mutual funds perform consistently, especially during periods of market volatility.
In the last three months of 2025, some thematic and sectoral mutual funds have witnessed sharp declines, falling between 7% and 15%. Most of these funds were concentrated in high-growth themes such as defence, real estate, and public sector undertakings (PSUs), which faced severe corrections due to market and macroeconomic factors.
This article highlights the 10 mutual funds that crashed the most in the last quarter, the reasons behind their fall, and the risks and opportunities for investors.
Why Did Mutual Funds Fall in the Last 3 Months?
Several global and domestic factors have triggered volatility in thematic funds. Some of the key reasons include:
1. Trump Tariff War Impact
The announcement of new US tariffs by the Trump administration spooked global equity markets. Emerging economies like India faced higher volatility as foreign investors booked profits, leading to declines in sector-focused funds.
2. Sector Rotation
Investors shifted away from overheated sectors such as defence and real estate to safer or undervalued areas. This rotation put significant selling pressure on niche funds.
3. Overheated Valuations
Defence and PSU stocks had rallied strongly in the past year. However, when earnings growth could not keep up with stretched valuations, steep corrections followed.
4. Rising Bond Yields
Higher global and domestic bond yields led foreign institutional investors (FIIs) to move money out of equities. This impacted mutual fund NAVs, particularly in volatile sectors.
5. Weak Domestic Demand
The real estate sector faced muted demand, project delays, and regulatory hurdles, further dragging down performance.
6. Global Macro Uncertainty
Factors like interest rate expectations, geopolitical tensions, and currency fluctuations added to the selling pressure. Thematic funds with concentrated exposure suffered the most.
Top 10 Mutual Funds That Fell Between 7% and 15% in the Last 3 Months
Based on data from Value Research and Moneycontrol (as of 31-Aug-2025), here are the worst-performing equity mutual funds:
| Fund Name | 3-Month Return (%) |
|---|---|
| Groww Nifty India Defence ETF FoF | -14.91 |
| Aditya Birla Sun Life Nifty India Defence Index Fund | -14.67 |
| Motilal Oswal Nifty India Defence Index Fund | -14.65 |
| Groww Nifty India Railways PSU Index Fund | -13.79 |
| HDFC Defence Fund | -8.90 |
| Tata Nifty Realty Index Fund | -8.43 |
| Nippon India Nifty Realty Index Fund | -8.21 |
| HDFC NIFTY Realty Index Fund | -8.10 |
| Quant PSU Fund | -7.82 |
| Quant Teck Fund | -7.36 |
A Closer Look at These Funds
Groww Nifty India Defence ETF FoF
This fund invests in the Groww Nifty India Defence ETF, tracking the defence sector index. It has fallen the most, losing nearly 15% in three months. While it offers exposure to long-term defence growth, the sector remains highly policy-sensitive.
Aditya Birla Sun Life Nifty India Defence Index Fund
Another defence-focused passive fund, this scheme mirrors the Nifty India Defence Index. Investors with high-risk tolerance may consider it for long-term growth, but the short-term volatility is significant.
Motilal Oswal Nifty India Defence Index Fund
Tracking the same defence index, this fund has also declined by around 14.6%. Though it has delivered positive 1-year returns, concentration risk remains high.
Groww Nifty India Railways PSU Index Fund
Focused on PSU and railway companies, this thematic fund fell nearly 14%. Its performance depends heavily on government spending and policy direction.
HDFC Defence Fund
An actively managed fund investing across defence and allied industries, it fell about 9% in three months. The long-term potential remains, but sectoral concentration risk is significant.
Tata Nifty Realty Index Fund
Tracking the Nifty Realty Index, this fund dropped over 8% due to weak demand in the real estate sector and interest rate sensitivity.
Nippon India Nifty Realty Index Fund
Another real estate sector tracker, this fund mirrored the same downtrend with an 8.2% fall. Realty remains a cyclical and volatile sector.
HDFC NIFTY Realty Index Fund
Similar to its peers, this fund dipped around 8.1%. While real estate may deliver long-term gains, short-term investors should be cautious.
Quant PSU Fund
Investing in public sector undertakings across industries, this fund slipped 7.8%. PSU performance often depends on government decisions and market cycles.
Quant Teck Fund
Focused on technology and digital themes, this fund corrected 7.3%. Global tech volatility and valuation concerns added pressure.
What Should Investors Do Now?
Sharp corrections in thematic funds may seem concerning, but they also present opportunities for disciplined investors. Here are some key takeaways:
- Reassess your horizon: If you have a long-term view, holding through volatility may be beneficial.
- Diversify wisely: Avoid putting too much money into a single theme. Balance sectoral funds with diversified equity schemes.
- Use dips selectively: If you strongly believe in the growth story of defence, PSU, or real estate, corrections could be entry points.
- Monitor risks: Keep track of policy changes, global trends, and valuations, as these funds are highly sensitive to external factors.
Conclusion
The last three months have been challenging for sectoral and thematic mutual funds in India. Defence, PSU, and real estate funds were among the worst hit, with returns falling between -7% and -15%. While these corrections underline the risks of concentrated exposure, they also open doors for long-term investors who believe in the fundamentals of these sectors.
Investors should align mutual fund choices with their financial goals, risk appetite, and time horizon. A diversified approach with a mix of core equity funds and selective thematic exposure is the best way forward in volatile times.