Mutual Funds Increase Capital Goods Allocations to 17-Month High, but Fund Managers Become Selective on Valuations

Domestic Mutual Funds Increase Exposure to Capital Goods Stocks

Domestic mutual funds have raised their exposure to capital goods stocks to a 17-month high, indicating continued confidence in India's manufacturing and infrastructure cycle. According to the latest data from the Fund Folio: Indian Mutual Fund Tracker by Motilal Oswal, capital goods accounted for 7.8 percent of mutual fund portfolios in April 2026, making it the third-largest sector exposure after private banks and automobiles.

The sector saw a significant month-on-month increase in fund allocation, with weights rising 60 basis points sequentially and 90 basis points year-on-year. This growth can be attributed to continued institutional interest in the broader India capex theme. The rise in allocations comes amid continued investor interest in themes tied to power transmission, defence manufacturing, railways, electronics manufacturing services (EMS), logistics, and industrial infrastructure.

Despite the overall increase in weightage, fund houses remain split when it comes to positioning across fund houses. HSBC Mutual Fund and Motilal Oswal had the highest exposure to capital goods at 15.2 percent and 16.1 percent, respectively, almost double the BSE-200 benchmark weight of 7.7 percent. In contrast, ICICI Prudential Mutual Fund and SBI Mutual Fund remained closer to benchmark weights, reflecting a more measured stance after the sector's sharp rerating.

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Fund managers are becoming more selective on valuations despite overall optimism for the sector. Ihab Dalwai, Senior Fund Manager at ICICI Prudential Mutual Fund, is not meaningfully overweight on capital goods due to reduced valuation comfort after the sector's rerating. Dalwai notes that power-related capital goods companies have benefited significantly from domestic transmission and HVDC capex as well as global investments linked to AI and data centres, resulting in strong stock performance and richer valuations.

Bharti Sawant, Fund Manager at Mirae Asset Mutual Fund, added that the sector has already undergone a substantial rerating over the last three to four years as India's capex cycle accelerated post-pandemic. Sawant noted that government capex has risen from 3.8 percent of GDP in FY20 to 6.1 percent in FY25, while infrastructure spending has increased from Rs 3.5 trillion in FY21 to a projected Rs 12.2 trillion in FY26.

"The sector has already travelled from deep-value cyclical multiples to structural-growth-premium multiples over the last three to four years," she said. According to Sawant, the capital goods sector is currently trading at around 41 times one-year forward earnings, significantly above its historical 10-year average of 27.5 times, supported by strong order books, visible growth opportunities, and improved return ratios.

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Most fund managers remain constructive on long-term opportunities across power infrastructure, defence indigenisation, grid modernisation, data centres, and electronics manufacturing. However, they cautioned that risks remain from any slowdown in public or private capex, project delays, commodity inflation, rising oil prices, and global supply-chain disruptions.