Investment funds: Thematic, sector funds are the focus of investors. Are they worth investing?

Investments in investment funds: In 2024, sector and thematic funds have become the focal point of the investment landscape, capturing 42% of total active mutual fund flows. This growth in interest is primarily driven by domestic investors, especially retail investors, who have shown a significant propensity towards sector and thematic funds. In the current year to date (CYTD), these funds have accounted for 42% of all active mutual fund flows.

The data shows that thematic and sector funds have collectively attracted investments worth Rs 70,000 crore since the beginning of this year. Public sector undertakings (PSUs), along with infrastructure and defence, have shown impressive returns of over 55% in the last 12 months. This significant performance has caught the attention of investors, encouraging them to ride on this uptrend in the market.

Specifically, manufacturing funds received the largest share of these inflows, accounting for 28% of the total amount, which is approximately Rs 19,500 crore. On the other hand, infrastructure funds took in 8% of the total inflows, which is approximately Rs 5,900 crore.

The mutual fund industry is witnessing growth due to the emerging trend of investing in manufacturing, as noted in a report by Elara Capital. 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 programme and infrastructure improvements, which have played a significant role in streamlining last-mile delivery processes.

The AUM of manufacturing funds at the beginning of this year was Rs 7,700 crore. As of June 2024, this has increased to Rs 32,200 crore, showing a significant expansion in a relatively short period.

Similarly, the AUM of infrastructure funds also witnessed a significant growth, starting from Rs 19,700 crore at the beginning of the year and rising sharply to Rs 32,300 crore by June 2024. Such a solid addition to the assets reflects a promising trajectory for both the sectors in the financial landscape.

Why Thematic and Sector Funds Are Gaining Popularity

“Thematic funds are gaining popularity with almost eight new funds launched in this category till June 24. AMCs are increasingly focusing on thematic funds as they are restricted from launching more diversified funds as they have already saturated this space. For established AMCs, thematic, sector and passive fund categories provide new avenues to grow and increase their AUM. These funds have caught the attention of investors as some of them have delivered impressive returns of up to 141% in a one-year period. Moreover, they cater to niche segments like tourism, defence, oil and gas to name a few with a diversified product,” said Shweta Rajani, Head – Mutual funds, Anand Rathi Wealth Limited.

“In the first three months of FY2024-25, around 33% or one-third of the total gross inflows in equity mutual funds went to thematic and sector-specific funds. Many investors primarily rely on the recent performance of funds to make investment decisions. Now, at any point in time, some or other sectors will perform significantly better in the short term than diversified portfolios. Hence, typical performance-chasing investors end up investing in funds that invest in such sectors or themes,” noted Nilesh D Naik, Head of Investment Products at Share.Market, in his column.

Is it worth investing?

“Thematic and sector funds are typically designed for experienced investors who already have a core portfolio and are looking for tactics based on their views on a particular sector or theme. Unfortunately, many investors who are relatively new to investing also seem to be heavily invested in such funds,” Naik noted.

“Sector or narrow-theme funds are generally designed for experienced investors who are looking for a short-term sector-based approach. Investors who are relatively new to investing will do better to focus on well-diversified funds to have a core portfolio and gain investment experience in at least one full market cycle before considering investing in sector and thematic funds. For most investors, there may not be a real need to have sector or thematic funds in their portfolio to achieve their long-term financial goals,” Naik added.

“The returns in the sector category also show a wide divergence, with the lowest performing funds returning around 5% over the same time frame. This disparity highlights the importance of careful selection; choosing the wrong fund can lead to disappointing results. Moreover, investors should understand that many themes are actually part of diversified funds of the same fund manager. The performance of these thematic funds is cyclical in nature and timing the entry and exit is very important for an investor investing in these funds. For long-term investments, investors should aim to build a diversified portfolio across market caps, categories and AMCs. This approach can help mitigate the risks associated with the cyclical nature of thematic funds, while fully matching the growth potential of sectors/themes and provide more stable returns over time,” added Rajani of Anand Rathi Wealth Limited.

What should you do?

Sector and thematic equity funds are mutual funds that focus on specific sectors or themes, known for their relatively higher risk levels compared to diversified equity funds. To build a strong portfolio of mutual funds, investors are advised to start with a solid foundation of well-diversified equity funds in categories like flexi-cap, large-cap, value, large and mid-cap and others. For experienced investors armed with a solid core portfolio and comprehensive knowledge of market dynamics, strategic allocation to sector and thematic funds can be considered based on their insights into a particular sector or theme.

(Investments in mutual funds are subject to market risk. The recommendations, suggestions, views and opinions mentioned in the article are those of experts. They do not reflect the views of Business Today)