Top Sectors for 2025: Pharma, infra look good; defence seems overvalued

The year 2024 was a great year for thematic or sectoral funds.

Investing in last year's top funds might seem appealing, but it's not always the best strategy, as the best-performing thematic or sectoral funds of a calendar year rarely do an encore in the following one.

In 2020, healthcare and information technology (IT) were outperformers, but in 2021, healthcare fared amongst lowest performers, in 2022, it delivered negative returns. IT was the worst performer in 2022.

“Investors are attracted to the sectors / themes that have done well in the past, but often, these may not perform the same in the future, and there are high chances that one ends up picking the wrong sector,” said Feroze Azeez, Deputy Chief Executive Officer, Anand Rathi Wealth.

So which sectors or themes are expected to do well in 2024 and which may underperform?

Winners and losers of 2024

2024 was a great year for thematic or sectoral funds. They saw massive inflows and now collectively hold more assets than any other category, at around Rs 4.61 lakh crore.

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In 2024, the defence, healthcare, consumer durables, and realty sectors performed well, while FMCG, PSU banks, and private banks underwhelmed. Media delivered negative returns.

On a long-term basis, defence, EV (electric vehicles) and new-age automotive, realty, PSEs (public sector enterprises), and healthcare have been the top-performing themes, while PSU and private banks, and media have underperformed.

Will the winners of 2024 do well?

According to Rajani Tandale, Senior Vice President, Mutual Funds, at 1 Finance, healthcare, infra, and PSU banks are reasonably valued, while the defence sector looks slightly overvalued.

“The performance of sectoral and thematic funds in 2025 will depend heavily on economic conditions and market dynamics,” Tandale said.

Sandeep Raina, Executive Vice-President, Research, Nuvama Professional Clients Group, also believes that defence, healthcare, infra, PSE, and tech may continue to do well.

“However, the stocks may change. New stocks which may not have performed earlier could come into the limelight as their businesses improve,” Raina said.

Experts advise some caution, though. Vivek Banka, Co-Founder, GoalTeller, a financial advisory, believes that while defence, healthcare, PSE, infra, and tech did well, the coming few years are expected to be more realistic in terms of returns for these sectors.

“While PSE and infra should do well over the next few years with the government push in these areas, the kind of upside they have seen will make them very volatile. Hence, these are only for long-term investors who can stomach high volatility. Also, despite the push for defence companies, I would be cautious and only invest in them on dips. The healthcare sector could continue to do well,” explained Banka.

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Swapnil Aggarwal, a Director at the financial advisory VSRK Capital, believes that rising geopolitical tension has triggered increased spending on defence. “That will likely sustain the robust demand for advanced defence equipment,” Aggarwal said.

Sectors that may do well in 2025

Per Tandale, in 2025, sectoral and thematic funds in healthcare and infrastructure are expected to offer better investment opportunities due to their reasonable valuations. In contrast, IT, FMCG, and metals appear overvalued and should be approached with caution.

On the other hand, Aggarwal believes that sectoral and thematic funds focussing on renewable energy, EVs, healthcare, technology, and the consumption sectors are expected to perform well in 2025.

“Additionally, rising disposable incomes and evolving consumer preferences are expected to fuel growth in the consumption sector, making these themes compelling investment opportunities in the year ahead,” Aggarwal said.

Azeez is betting on infrastructure, primarily due to its underlying sectors.

Outlook for 2025

The outlook for equity markets in 2025 remains cautiously optimistic.

The year has started on a positive note, with the Nifty gaining 1.25 percent and the Nifty 500 advancing 1.4 percent in the first week. This broad-based rally signals a stable start to 2025.

“While market valuations appear stretched, particularly in the mid and smallcap spaces, history tells us that such conditions can persist longer than expected,” said Krishna Appala, Senior Research Analyst, Capitalmind Research.

Equities are coming off a dream run of the past two-three years, and expecting an encore could be unrealistic.

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“Despite concerns of over-valuation in many quarters, lower earnings, and FII outflows, there is an outside chance of markets surprising on the upside if geopolitical tensions ease, coupled with abating fears of trade wars,” said Banka.

Investors should avoid chasing past trends and instead assess future prospects carefully. Since sectoral funds tend to perform in cycles, a diversified flexicap fund may be a better choice, as it offers fund managers the flexibility to adapt to changing market conditions across market caps.