Why owning sector leaders could be a smarter core bet in 2026, Axis Mutual Fund’s Karthik Kumar explains

As Indian markets head into 2026 with moderated valuations and expectations of an earnings-led cycle, investors are reassessing how to build resilient core portfolios. In an interaction with ET Markets, Karthik Kumar, Fund Manager at Axis Mutual Fund, explains why a rules-based approach to owning sector leaders across the economy can help reduce concentration risk, capture leadership, and navigate volatility more effectively than traditional market-cap weighted indices. The fund house has recently launched Axis BSE India Sector Leaders Index Fund.

Edited excerpts from a chat on the NFO and market outlook:

What strategic gap in investor portfolios does this Sector Leaders Index NFO aim to address, especially versus broad-based market-cap weighted indices?Most retail portfolios today are dominated either by broad market-cap indices or by thematic/sectoral products that depend heavily on market opportunity and timing. What tends to be missing is a simple, rules-based way to own leadership across the entire economy — not just the biggest sectors or the most talked-about themes. The BSE India Sector Leaders Index fills that gap by selecting the top three companies in each sector from the BSE 500 based on six-month average total market capitalisation and ensuring they are represented with both a floor and a ceiling weight to avoid over-concentration. This is different from traditional indices that often skew heavily toward a handful of mega-caps.Further since it considers 21 sectors, themes that otherwise wouldn’t make it to front line indexes also find representation in this index. The index construction process ensures that there is adequate diversification of portfolio, reduces concentration risk, and domination by large constituents. It also lowers portfolio volatility driven by large constituents and helps manage sector/stock-specific shocks.

At a time when India enters 2026 with expectedly stable valuations and an earnings-led market, this fund provides core exposure to the country’s most established companies across 21 sectors — a gap that broad indices, by design, don’t always address. In other words, it converts “leadership across sectors” into an investable, core building block that investors can systematically hold through cycles, backed by a transparent index and delivered at index‑fund costs.Given the index methodology of picking the top three companies per sector, how do you assess the risk of concentration versus the benefit of leadership dominance?The risk of concentration is largely mitigated by design. The index imposes a maximum stock weight of 5% and a minimum of 1%, ensuring no constituent becomes disproportionately influential simply because of its size. For instance, if we look at the tail of the index, the bottom 10 stocks by weight in the BSE India Sector Leaders index contributes approx. 9.5% vs. close to 0.1% in BSE 500 index. This diversification also helps smooth volatility and avoid skewing the portfolio toward a handful of well‑owned large‑caps. At the same time, the leadership bias adds meaningful value. Sector leaders tend to have stronger balance sheets, brand equity, scale advantages and governance standards, and they generally demonstrate higher resilience during challenging environments. Furthermore, the semi‑annual reconstitution and the top‑5 buffer rule ensure that leadership is captured without excessive churn. The result is a portfolio that systematically harnesses the benefits of dominant companies while keeping concentration risk visibly in check.

How should investors think about this fund in the context of the current valuation landscape?India is entering 2026 with valuations that have moderated meaningfully. Our house view notes that India’s valuation premium over emerging markets has narrowed and stabilised, with earnings now likely the primary driver.. In fact, many global and domestic brokerages expect 2026 to be an earnings-led market, with Nifty’s upside driven by profit growth rather than P/E expansion.

In such an environment, owning a curated set of sector leaders can serve as a potentially stabilising allocation. These companies typically deliver more predictable earnings and display higher resilience. With the broader market showing divergence — mid and small caps still carrying premium valuations in pockets — a rules‑based leadership index helps investors balance return potential with quality.

What is your outlook on sector rotation over the next 12–18 months, and how dynamically does this index adapt to emerging sectoral leadership?Markets in 2026 will likely be shaped by three forces: policy support, consumption recovery, and capex execution. Continued public capex momentum — particularly in railways and defence — is expected to support industrials and capital goods. Meanwhile, income‑tax changes and GST rationalisation are expected to normalise consumption trends, supporting discretionary sectors. Financials should continue to benefit from improving credit demand in a benign rate environment.

On the other hand, global cyclicality means export‑linked sectors such as IT could show select strength as GenAI initiatives and global tech spending stabilise into FY27. These shifts underline a year where sector leadership will not be uniform — making systematic sectoral breadth valuable. The index focusses on capturing medium to longer term moves through the largest players across sectors. While this is not a sectoral or a sector timing index, it intends to add value by having meaningful presence across 21 sectors compared to frontline indexes.

The index itself adapts semi‑annually, using market‑cap leadership as its primary filter, with the top‑5 buffer reducing unnecessary churn. This means it does not chase short‑term sector winners, but it captures emerging leadership as it becomes structurally established. It’s a balanced approach — dynamic enough to stay relevant, steady enough to avoid whipsaws.

As we head into the Union Budget amid heightened market volatility and persistent global uncertainties, what is the Street’s expectation from the finance minister?The Street broadly expects the Budget to reinforce policy continuity, with a focus on capex, jobs, and steady fiscal consolidation, aiming for a balance between supporting growth and preserving macro credibility. Markets also anticipate targeted social spending and ongoing structural reforms, even as global pressures—from tariff uncertainty to geopolitical tensions—continue to influence sentiment. Messaging around the fiscal glide path remains especially important. With soft nominal GDP growth, investors will watch how the government aligns revenue assumptions with expenditure priorities.

From a market standpoint, what specific policy measures or fiscal signals would be most constructive for equities – whether on capex push, consumption support, or fiscal consolidation?We don’t believe that the market is looking for big surprises this year — it wants policy continuity. A steady push on quality capex will be essential because these areas offer strong multiplier effects and support an earnings‑led recovery. Alongside this, the Street expects measured consumption support—targeted GST or income‑tax adjustments that boost demand without derailing fiscal discipline. Paired with ongoing manufacturing and PLI momentum, these measures can reinforce the broadening earnings recovery into FY27.