Thematic funds top equity MF investment rush, see record net inflows of over Rs 22,000 crore in June

Sectoral and Thematic Funds

Sectoral and thematic funds invest in equity and equity-related instruments of a specific sector or theme. Sectoral funds focus on a particular sector of the economy, such as infrastructure, banking, technology, or pharmaceuticals, allocating 80 per cent of their underlying assets to that specific sector. Since these funds concentrate on just one sector, they limit diversification and are therefore riskier. The timing of investments in such funds is important, as sector performance tends to be cyclical. Thematic funds select stocks of companies in industries related to a specific theme, such as infrastructure, service industries, public sector units (PSUs), or multinational companies (MNCs). Since thematic funds also allocate 80 per cent of their underlying assets to sectors related to a specific theme, they tend to be more diversified than sectoral funds, resulting in lower risk.

Flows into Thematic Funds

The Association of Mutual Fund Industries (AMFI) provides combined data for sectoral/thematic funds. According to June data, net inflows into sectoral/thematic funds reached Rs 22,351 crore, which accounted for 55 percent of total inflows into equity mutual funds for the month.

In June, Rs 14,370 crore was mobilised through 11 new fund offerings (NFOs) in equity-oriented schemes. Among these, nine schemes were launched in the sectoral/thematic fund category, raising Rs 12,974 crore, which is 90 per cent of the total amount raised from the 11 new equity schemes launched during the month. In the quarter ended June 2024, total net inflows into equity schemes stood at Rs 94,222.28 crore, with sectoral/thematic funds receiving almost 50 percent of that at Rs 46,731 crore.

Over the past year, sectoral/thematic funds have received net inflows of Rs 92,423.4 crore, or one-third of the total flows into overall equity mutual funds, which amounted to Rs 2.68 lakh crore. The overall assets under management (AUM) of sectoral/thematic funds grew 60 per cent to Rs 3.83 lakh crore as of June 2024, up from Rs 1.96 lakh crore in June 2023.

Surge in Inflows

According to Gopal Kavalireddi, Vice President of Research at FYERS, the following factors have significantly contributed to the increased interest from investors in sectoral/thematic funds:

Positive Trends: Investors are typically drawn to trending sectors that indicate potential for superior returns due to continuous positive news flow or momentum. PSUs/PSBs, along with the defense, shipbuilding, and automotive sectors, have continuously exhibited positive trends.

Government Support: Policies and reforms that support the private sector and government capital expenditures in core areas like 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 economy-facing sectors have experienced turbulent times over the last decade. The previous underperformance of this category offered relative valuation comfort to fund managers and investors.

New Fund Offerings: New and emerging sectors and themes, such as manufacturing, defense, and special opportunities presented by various Asset Management Companies (AMCs), have attracted interest. For instance, the HDFC Manufacturing fund NFO saw substantial subscriptions of Rs 9,563 crore.

Returns from These Funds

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

Suitability of These Funds

Fund managers advise that the attractive returns provided by sectoral/thematic funds should not be the sole reason for an investor to choose these categories. Thorough research is essential before investing, as these funds carry higher risks.
“Investors with a long investment horizon and a higher risk appetite should consider investing in sectoral or thematic funds,” Kavalireddi said.