Mutual fund investment: In the year 2024, sectoral and thematic funds have emerged as the focal point in the investment landscape, capturing 42% of the total active mutual fund inflows. This surge in interest is primarily driven by domestic investors, notably retail investors, who are displaying a significant penchant for sectoral and thematic funds. As of the current year to date (CYTD), these funds have constituted 42 per cent of all active mutual fund flows.
Based on the data, it has been observed that thematic and sectoral funds have collectively attracted investments amounting to Rs 70,000 crore since the commencement of this year. Public Sector Undertakings (PSUs) alongside infrastructure and defence sectors have demonstrated impressive returns exceeding 55% over the past 12 months. This significant performance has attracted the attention of investors, enticing them to capitalize on this upward trend in the market.
Specifically, manufacturing funds have received the largest share of these inflows, accounting for 28% of the total amount, which equates to approximately Rs 19,500 crore. On the other hand, infrastructure funds have captured 8% of the total inflows, translating to around Rs 5,900 crore.
The mutual fund industry is experiencing growth due to the emerging trend of investing in manufacturing, a report by Elara Capital noted. This investment theme is based on the ongoing transformation of the country’s manufacturing sector. This transformation is being driven by strategic initiatives such as the ‘China+1’ strategy, the Government’s PLI scheme, and the improvement in infrastructure, all of which have played a significant role in streamlining last-mile delivery processes.
The AUM of manufacturing funds at the beginning of the current year were Rs 7,700 crore. As of June 2024, this figure has grown to Rs 32,200 crore, showcasing significant expansion within a relatively short period.
In a similar vein, the AUM of Infrastructure funds also witnessed substantial growth, starting at Rs 19,700 crore at the commencement of the year and soaring to Rs 32,300 crore by June 2024. Such robust amplification in assets reflects a promising trajectory for both sectors in the financial landscape.
Why thematic, sectoral funds gaining popularity
“Thematic funds have been gaining significant popularity, almost eight new funds were launched in this category as of June 24. AMCs are increasingly focusing on thematic funds because they are restricted from launching more diversified funds, having already saturated that space. For established AMCs, the thematic, sectoral, and passive fund categories provide new avenues for growth and increasing their AUM. These funds have drawn investor attention as some of these funds have delivered impressive gains of up to 141% over a one-year period. Moreover they are catering to niche segments like tourism, defence, oil and gas to name a few offering a differentiated product,” said Shweta Rajani, Head – Mutual funds, Anand Rathi Wealth Limited.
“In the first three months of financial year 2024-25, approx 33% or one third of the overall gross inflows in equity mutual funds have gone into thematic and sectoral funds. There are many investors who rely primarily on recent performance of funds to make their investment decisions. Now, at any given point of time, some or the other sector will have significantly better short term performance than the diversified portfolios. Thus, typical performance chasing investors end up investing in funds that invest in such sectors or themes,” Nilesh D Naik, Head of Investment Products, Share.Market, noted in a column.
Should you invest?
“Thematic and sectoral funds are typically meant for seasoned investors who have their core portfolio in place and who seek a tactical play based on their views on a particular sector or theme. Unfortunately, many investors who are relatively new to investing also seem to be investing in such funds in a big way,” Naik noted.
“Funds that track specific sectors or narrow themes are typically meant for seasoned investors who seek a tactical play based on their short term sectoral views. Investors who are relatively new to investing are better off focusing on well diversified funds to have their core portfolio in place and gain investing experience across at least one full market cycle before considering investment in sectoral and thematic funds. For most investors, there may not be a real need to have sectoral or thematic funds in their portfolios to achieve their long-term financial goals,” Naik added.
“The returns in the sectoral category show a wide divergence as well, with the lowest-performing funds returning around 5% in the same timeframe. This disparity depicts the importance of careful selection; picking the wrong fund could lead to disappointing results. Moreover, investors should understand that a lot of themes actually form a part of a diversified funds of that fund manager also. The performance of these thematic funds is cyclical in nature and for an investor investing in these funds, it would be very critical to time entry and exit. For long-term investment, investors should aim to create a diversified portfolio that spans various market caps, categories and AMCs. This approach can help mitigate risks associated with the cyclical nature of thematic funds whole befitting from upside potential of the sectors/ themes and ensure more stable returns over time,” Rajani of Anand Rathi Wealth Limited added.
What should you do?
Sectoral and thematic equity funds are investment funds that focus on specific sectors or themes, known for their relatively higher risk levels compared to diversified equity funds. To build a strong mutual funds portfolio, investors are advised to start with a solid foundation of well-diversified equity funds across categories such as flexi-cap, large-cap, value, large and mid-cap, and others. For seasoned investors equipped with a robust core portfolio and a comprehensive knowledge of market dynamics, strategic allocation to sectoral and thematic funds can be considered based on their insights into the particular sector or theme under consideration.
(Mutual Fund investments are subject to market risks. The recommendations, suggestions, views, and opinions mentioned in the article are by experts. These do not represent the views of Business Today)