Sectoral and thematic funds in India saw unprecedented net inflows exceeding Rs 22,000 crore in June, representing about 55% of the total net inflows into equity mutual fund (MF) schemes for the month. This surge aligns with a wave of new launches, with nine out of eleven new equity schemes being sectoral/thematic, collectively raising Rs 12,974 crore.

Even in the first quarter of FY25, sectoral/thematic funds led inflows among equity schemes, becoming the most popular equity investment category. Investor confidence in sectors such as railways, infrastructure, renewables, and energy, bolstered by favorable government policies and significant capital allocation, has driven this trend. However, investors are advised to thoroughly evaluate their risk tolerance and investment horizons before committing to these funds.

Understanding Sectoral and Thematic Funds

Sectoral and thematic funds focus on investing in equity and equity-related instruments within a specific sector or theme. Sectoral funds target a particular economic sector, like infrastructure, banking, technology, or pharmaceuticals, dedicating 80% of their assets to that sector. This narrow focus limits diversification and increases risk, making timing crucial as sector performance can be cyclical.

Thematic funds, on the other hand, invest in companies related to a specific theme such as infrastructure, service industries, public sector units (PSUs), or multinational companies (MNCs). These funds are generally more diversified than sectoral funds, thus carrying lower risk.

Significant Inflows into Thematic Funds

According to data from the Association of Mutual Fund Industries (AMFI), net inflows into sectoral/thematic funds in June reached Rs 22,351 crore, constituting 55% of total equity mutual fund inflows for the month.

Of the Rs 14,370 crore mobilized through 11 new fund offerings (NFOs) in equity-oriented schemes in June, nine were sectoral/thematic funds, raising Rs 12,974 crore. In the quarter ending June 2024, total net inflows into equity schemes amounted to Rs 94,222.28 crore, with sectoral/thematic funds accounting for nearly half at Rs 46,731 crore.

Surge in Popularity and Asset Growth

Over the past year, sectoral/thematic funds have attracted net inflows of Rs 92,423.4 crore, representing one-third of the total equity mutual fund inflows, which totaled Rs 2.68 lakh crore. The overall assets under management (AUM) for these funds grew by 60% to Rs 3.83 lakh crore as of June 2024, up from Rs 1.96 lakh crore in June 2023.

Factors Driving Increased Interest

Gopal Kavalireddi, Vice President of Research at FYERS, attributes the rising interest in sectoral/thematic funds to several key factors:

  • Positive Trends: Investors are drawn to sectors with strong positive momentum, such as PSUs/PSBs, defense, shipbuilding, and automotive, due to ongoing favorable news and trends.
  • Government Support: Policies and reforms supporting private sector growth and significant government capital expenditures in railways, renewables, infrastructure, and energy, with a planned capex of Rs 21 lakh crore for FY24 and FY25, have boosted investor confidence.
  • Valuation Comfort: Many sectors have experienced challenging times over the past decade, providing relative valuation comfort to fund managers and investors.
  • New Fund Offerings: Emerging sectors and themes, such as manufacturing, defense, and special opportunities presented by various Asset Management Companies (AMCs), have garnered interest. For example, the HDFC Manufacturing fund NFO received substantial subscriptions of Rs 9,563 crore.

Performance and Suitability of These Funds

According to Value Research data, sectoral funds in banking, infrastructure, pharmaceuticals, and technology have delivered returns ranging from 25.76% to 73% over the past year. Thematic funds focused on themes such as consumption, energy, MNCs, PSUs, and ESG (Environmental, Social, and Governance) have provided returns between 20% and 99.54%.

Despite these attractive returns, fund managers caution that these should not be the sole reason for choosing sectoral/thematic funds. Comprehensive research and understanding of the risks are crucial before investing. "Investors with a long investment horizon and a higher risk appetite should consider investing in sectoral or thematic funds," advises Kavalireddi.