“The market has also witnessed a surge in new fund offers (NFOs), especially sectoral and thematic funds. This trend emerged partly because SEBI’s categorisation, which allows only one fund per category for Asset Management Companies (AMCs), limited the scope for launching more diversified products. As markets rallied, more such funds were launched, further driving inflows into these products,” said Rajesh Minocha, a Certified Financial Planner (CFP) and founder of Financial Radiance.
The sectoral and thematic mutual funds have received an inflow of around Rs 96,489 crore in FY25 so far (till September 30, 2024) with highest inflow in June of Rs 22,351 crore. Among all equity mutual fund categories, sectoral and thematic funds have continued to receive highest inflows for six straight months. (Source: ACE MF)
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The total inflows in the equity mutual fund category has been Rs 2.03 lakh crore in FY25 so far. Sectoral and thematic funds have contributed 50% to this total inflows.
With more funds being launched in this category and then receiving the highest inflows, the important thing to know is how healthy is this trend and are we betting too much on the themes that may not stand with the test of time.According to the expert, investors often focus on trends by choosing the funds based on recent performance rather than doing proper research. One should always build a well-diversified portfolio which is aligned with the long-term objectives.“Often, investors chase trends by selecting funds based on recent performance rather than doing thorough research aligned with their risk appetite, financial goals, and investment horizon. A common practice is to focus on the past one year’s returns, leading to investments in “best” funds without considering long-term suitability,” recommended Minocha.
“When market cycles reverse or a specific theme underperforms, investors holding such narrowly focused funds may face significant losses. It underscores the importance of avoiding impulsive investing and instead building a well-diversified portfolio aligned with long-term objectives,” he added.
In FY25 so far, sectoral and thematic funds have offered an average return of 2.63%. Mirae Asset Hang Seng TECH ETF FoF gave the highest return of 33.07% in FY25 so far, followed by Edelweiss Gr China Equity Off-Shore Fund which gave 17.17% return in the same time period.
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Axis Greater China Equity FoF and Motilal Oswal Business Cycle Fund gave 16.30% and 13.68% returns respectively in the same time period. HDFC Defence Fund lost 3.49%. Samco Active Momentum Fund and Quant Teck Fund gave negative returns of around 2.08% and 1.99% respectively in the same period.
Looking at the recent performance, should you make an investment in sectoral and thematic funds? What should be the allocation one should have in their portfolio?
The expert recommends that sectoral and thematic funds should not form the core of an investor’s portfolio and should not constitute more than 8-10% of the portfolio. One should go for flexi cap and multi cap funds as they offer broader diversification.
“Thematic funds should complement, not form the core of an investor’s portfolio. Ideally, they should constitute no more than 8-10% of the portfolio. For aggressive investors with a long investment horizon of 15+ years, this allocation could be increased to 20%,” recommended Minocha.
He added, “Most of the investments should be in flexi-cap and multi-cap funds, which offer broader diversification. Once skilled fund managers are selected, they have the flexibility to pick stocks across sectors, optimising returns over the long term.”
In FY25 so far (till October 15), around 29 sectoral and thematic funds have been launched. Out of these 29 funds, three funds are still under their NFO period. The major sectors or themes focused in the said period were business cycle, manufacturing, automotive/special/ innovative/ energy opportunities, technology, healthcare, and consumption.
Among these 29 funds, Motilal Oswal Mutual Fund launched four funds. Bandhan Mutual Fund and WhiteOak Capital Mutual Fund came up with three funds each. SBI Mutual Fund, Invesco Mutual Fund, Kotak Mutual Fund launched two funds each.
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With many options available under this category, investors should know which sector or theme to pick that is likely to have a longer runway.
Investors who are seeking relatively lower risk should prefer thematic funds over sectoral funds. The advantage lies in the broader scope of themes, the expert recommends.
“For aggressive investors seeking relatively lower risk, thematic funds are preferable to sectoral funds. The advantage lies in the broader scope of themes. For example, if India’s growth is driven by consumption, a consumption-themed fund would provide diversified exposure across multiple industries, such as consumer goods, telecom, automobiles, food delivery, and others,” commented Minocha.
“In contrast, a sectoral fund – like one focused solely on cement, would be limited to stocks within that sector. If the sector underperforms, the fund’s returns would suffer, and redemption pressures could force the sale of stocks at unfavorable prices, as the fund manager lacks the flexibility to invest outside the sector,” he further added.
Mutual fund advisors do not recommend sector or thematic funds to new or inexperienced investors. These schemes are extremely risky and volatile and their fortunes depend entirely on the prospects of the sector or theme. Every sector or theme goes up or down in certain phases in the economy.
Regular investors would find it difficult to time their entry and exit in these schemes or wait for the fortunes to change. That is why these schemes are recommended only to seasoned or evolved investors. However, one should invest only a small percentage of the total portfolio in these schemes.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)
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