Equity mutual funds continued to witness strong inflows in February 2026, although the pace moderated slightly amid the ongoing US-Iran war in the Middle East. According to a report by JM Financial, domestic equity mutual funds recorded inflows of ₹37,600 crore in February, marking a 2% month-on-month decline after a similar drop in January.
Despite the marginal slowdown, mutual funds remained active in the market, selectively increasing exposure to certain sectors while trimming positions in others.
Mutual funds overweight on pharma, e-commerce and capital goods
The report shows that the top five sectors where domestic mutual funds are overweight compared with the BSE 200 remain unchanged from January.
These sectors include Pharmaceuticals & Healthcare, E-commerce, Consumer Durables, Capital Goods and Agrochemicals & Petrochemicals.
Among them, pharmaceuticals and healthcare is the most overweight sector with a 1.2% higher allocation than the BSE 200, followed by e-commerce (0.8%), consumer durables (0.6%), and capital goods (0.6%).
In addition, mutual funds have also built exposure to sectors such as ceramics, plyboards & glass, media, sugar and diversified, even though these sectors have no representation in the BSE 200 index.
Private banks, oil & gas among most underweight sectors
On the other hand, domestic mutual funds remain underweight in several large sectors relative to the benchmark. The top underweight sectors include Private Banks (-3.4%), Oil & Gas (-3.1%), Metals & Mining (-1.8%), Consumer (-1.7%) and IT Services (-1.5%).
Private banks have the largest underweight positioning, even though the sector accounts for a significant 19.4% weight in the BSE 200, compared with 16.1% in the mutual fund industry’s portfolio.
Other sectors where MFs are slightly underweight include telecom services, engineering & construction, PSU banks and utilities.
Mutual funds increase cash holdings
The report also highlighted that mutual funds slightly increased their cash holdings during the month.
Cash levels stood at ₹2,09,800 crore in February, accounting for 4.7% of total equity assets under management (AUM). This is higher than ₹2,06,300 crore in January, although the cash-to-AUM ratio remained unchanged at 4.7%.
Private banks, IT lead sectoral buying
Among sectors, private banks saw the highest buying activity by mutual funds in February, with purchases worth ₹16,412 crore.
The top private bank stocks bought were HDFC Bank, ICICI Bank, Kotak Mahindra Bank, IndusInd Bank and Bandhan Bank.
At the same time, funds trimmed exposure to Axis Bank, IDFC First Bank, and Karur Vysya Bank.
The IT services sector was the second-largest buying segment, with purchases worth ₹12,741 crore. Top IT buys included Infosys, HCL Technologies, Coforge, Tata Consultancy Services (TCS) and Fractal Analytics. Meanwhile, the sector saw selling in Wipro, Tech Mahindra, and Tata Elxsi.
PSU banks, NBFCs see highest selling
Among sectors with the highest levels of selling, PSU banks topped the list with a sell value of ₹8,911 crore.
Major PSU bank stocks sold included State Bank of India (SBI), Bank of India, Union Bank of India, Punjab & Sind Bank and UCO Bank. However, funds selectively bought Canara Bank, Punjab National Bank, and Bank of Baroda shares.
The NBFC sector also witnessed heavy selling of about ₹6,127 crore, with funds reducing exposure to Bajaj Finance, Jio Financial Services, BSE Ltd, Aditya Birla Capital, and Max Financial Services.
Overall, the data suggests that while mutual funds continue to allocate money to sectors such as private banks and IT, they remain structurally overweight on pharma, e-commerce and capital goods, while maintaining a cautious stance toward oil & gas, metals and certain financial segments.
