Fund houses offer thematic funds for niche investment options. While a favourable market can offer substantial returns, these funds carry significant risks. Investors should tread with caution and limit their exposure to around 10% of their equity-fund portfolio.
In a bull market, investors often seek opportunities to outperform by focusing on specific sectors or themes that are currently in favour. This demand is amplified by the perception that these targeted investments can offer higher returns compared to more broadly diversified funds. Asset management companies capitalise on this interest by launching new thematic and sectoral funds, which allows them to offer niche investment options.
In the last three months, sectoral and thematic funds mopped up `60,000 crore out of the `1.12 trillion flows into equity mutual fund schemes. Most of the inflows in these funds are lump sum investments through new fund offers (NFOs).
Exercise caution
Sectoral funds focus on emerging or trending sectors such as energy, infrastructure, or specific themes like consumption or defence, attracting investors who are eager to benefit from anticipated growth in these areas. Nirav Karkera, head, Research, Fisdom, says thematic and sectoral funds tend to be cyclical, which means their performance can be highly volatile and closely tied to the specific sector or theme they focus on. “If the sector underperforms or if market conditions change, these funds can experience sharp declines. Moreover, these funds often have a concentrated portfolio, increasing the risk further,” he says.
Similarly, Soumya Sarkar, co-founder, Wealth Redefine, says it is crucial for investors to exercise caution. These funds concentrate on specific sectors, which might not perform well in the long term. “When investing in sector-based products, there is a significant risk involved, and if the sector underperforms, the entire investment could be at risk,” he says.
Hedge your bets
While sectoral funds offer the potential for high returns in specific sectors, they are also subject to cyclical downturns. To hedge their bets, investors should diversify their investments across multiple sectors. This will reduce the impact of any downturn on their overall portfolio.
Moreover, maintaining a core holding in diversified equity funds can provide stability and help buffer against the volatility of sectoral funds. “By closely monitoring sector-specific trends and economic indicators, investors can make informed decisions and potentially capitalise on emerging opportunities while managing risk,” says Karkera.
As sectoral funds are a high-risk category, investors should invest only a small quantum of funds. “Invest only around 10% of the total equity portfolio in these funds,” says Sarkar. When investing in sectoral funds, ensure you have hedging positions in lower-risk categories like debt or balanced advantage funds to protect the capital if the sectoral fund does not perform as expected.
Sectors showing promise
Given the government’s focus on infrastructure development, sectors such as industrials, capital goods, and consumer discretionary are expected to benefit significantly from increased public spending and supportive policies. Additionally, the technology sector continues to be a key area of growth, benefiting from ongoing digital adoption and technological advancements.
In fact, some of the upcoming NFOs are largely centred around these themes. For instance, funds like the SBI Nifty India Consumption Index Fund, Invesco India Technology Innovators Fund, Motilal Oswal Manufacturing Fund are all designed to capitalise on the anticipated growth within these areas.
While diversified equity and large-cap funds offer stability and broad market exposure, sectoral funds provide opportunities for higher returns. By combining systematic investment plans in diversified and sectoral funds, investors can expect balanced returns.