Sectoral and thematic mutual funds, which attracted significant inflows in FY25, witnessed a sharp slowdown in FY26 as investors shifted towards categories offering greater flexibility and diversification.
Folio additions in sectoral and thematic funds plunged nearly 90% to 1.33 million in FY26 from 12.54 million in FY25. Net inflows into the category also fell 80% to around ₹30,000 crore from ₹1.47 lakh crore during the same period.
While the number of new fund offers (NFOs) in the category also declined, the drop was relatively moderate — from 52 in FY25 to 38 in FY26.
Analysing Cyclical Normalisation
DP Singh, joint CEO, SBI Mutual Fund, said fewer scheme launches and weak one-year returns were the primary reasons behind the sharp decline in folio additions and inflows. He described the moderation as cyclical and said future scheme performance would determine investor interest in the category.
Vaibhav Chugh, CEO, Abakkus Mutual Fund, echoed a similar view, calling the decline a natural normalisation after exceptionally strong participation by investors in FY25. Recommending that investors restrict exposure to sectoral and thematic funds to 10-15% of their portfolios, he said the moderation reflects increasing investor maturity and a more balanced approach towards thematic investing.
Looking ahead, Chugh said innovation in the category is likely to become more selective, research-driven and structurally anchored. “The focus is expected to gradually shift from broad, narrative-led themes to multi-year opportunities emerging from enduring economic transformations and new thematic ideas. Themes aligned with the ‘New India’ growth narrative are likely to continue attracting investor interest,” he added.
He also said fund houses would need to maintain greater discipline in portfolio construction to avoid excessive concentration risk in specific stocks or market capitalisations. According to him, the category is likely to evolve with stronger emphasis on suitability, allocation discipline and clearer positioning as a tactical, high-conviction component within investor portfolios.
Restructuring Tactical Satellite
Suranjana Borthakur, head of distribution at Mirae Asset Mutual Fund, said investors who chased near-term performance in sectoral and thematic funds are now reassessing their portfolios and shifting towards more diversified, patient-capital categories.
She described the decline in inflows and folio additions as a “reset” for the category, with investors increasingly viewing thematic funds as tactical satellite allocations rather than core holdings. “The FY26 numbers reflect a more rational investor allocation,” she said.
While India’s evolving economy continues to create opportunities for new investment themes, Borthakur said investors are likely to approach the category more purposefully — entering with a clear investment view and holding with conviction rather than chasing momentum.