In 2024, Sectoral and thematic funds performed well by amassing Rs. 1,09,711 crores, with thematic funds experiencing an impressive growth of 488%. However, all sector and thematic mutual funds have delivered negative returns this year. Thematic funds, which concentrate on particular industry trends, have been particularly affected by market fluctuations, leading to decreased returns.
Despite new fund launches in this space, market experts are advising investors, especially those who are new to investing, to approach these investments with caution. Sectoral and thematic equity funds are known for their higher risk levels compared to diversified equity funds, making them potentially unsuitable for inexperienced investors. Recent discussions have also highlighted the need for more regulation of thematic NFOs.
Data from Value Research showed that the category experienced a return of 15.13% over three years and 19.54% over five years, surpassing the BSE 500 benchmark. Despite this outperformance, recent market volatility is a cause for concern, with the category declining by 14.52% year-to-date and nearly 10% in the past month.
“Thematic mutual funds are typically meant for seasoned investors who have their core portfolio in place and who want to take a tactical bet based on their views on a specific sector or theme. Most retail investors will be better off avoiding thematic and sectoral funds in their portfolios. While equity as an asset class tends to be highly volatile, the historical data suggests that the broad-based equity portfolios or indices typically tend to recover within 2-3 years after the market fall, compared to sectoral or thematic portfolios which may often take several years or even over a decade to recover. For e.g. it took over a decade for the Infrastructure sector indices to recover to their January 2008 levels after the steep fall during the global financial crisis. Similar was the case with the IT sector after the dotcom-related fall from its peak in 1999-2000,” said Nilesh D Naik, Head of Investment Products, Share.Market (PhonePe).
Thematic funds have shown little significant outperformance compared to diversified funds over extended periods. Current returns on thematic funds are disappointingly low and evidence suggests they do not add meaningful long-term value. Given the forecasted uncertainty in the market, investors are strongly advised to refrain from pursuing thematic investments at this time.
In 2024, a significant number of investors preferred thematic funds over flexi-cap or multi-cap funds. According to AMFI data for January, investments into thematic funds totaled approximately Rs 9,000 crore, marking a decrease from the previous month’s figure of around Rs 15,322 crore.
So, what should investors do now?
“With respect to existing investments in thematic or sectoral funds, the strategy would depend on various factors such as the sector or theme they invested in, tax implications depending on whether the investor has unrealised gains or loss on such investment, tax harvesting opportunity if there are gains on other investments, their other holdings in the portfolio, and so on. However, most retail investors, especially those who are new to investing would do well to avoid allocating fresh investment to thematic and sectoral funds. Instead, they should stick to core fund categories such as Large Cap, Flexi Cap, Value, Large and Midcap, etc,” Naik added.
Thematic funds in 2025
In the current calendar year, the Shriram Multi-Sector Rotation Fund experienced the highest negative return at approximately 25.74%. Following closely behind was the Union Active Momentum Fund, which delivered a negative return of 24.78% during the same period.
The Motilal Oswal Manufacturing Fund saw a negative return of 22.68% so far in 2025, while the Kotak Infra & Eco Reform Fund lost 22.65% in the same period.
The HDFC Defence Fund, the sole active fund focused on the defense sector, reported a negative return of around 21.43% in this calendar year. Additionally, the Invesco Mutual Fund had two schemes with negative returns – the Invesco India Technology Fund at around 20.99% and the Invesco India Infrastructure Fund at 20.74% during the mentioned period.
Advice for investment
For a well-rounded mutual funds portfolio, it is recommended that investors begin by establishing a strong base of diversified equity funds spanning various categories including flexi-cap, large-cap, value, large and mid-cap, and more.
Experienced investors, who have a solid core portfolio and an in-depth understanding of market trends, may choose to strategically allocate to sectoral and thematic funds based on their insights into specific sectors or themes.
(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)
