Investors Should Tread Cautiously While Investing in Thematic, Sectoral Funds: ICRA

The significant surge in inflows into sectoral and thematic funds witnessed over the last five years notwithstanding, investors should tread cautiously while investing into these funds. It is important for investors to stay updated about the latest market trends and economic developments and take well informed decisions while putting money into these funds, ICRA Analytics said in a report on Wednesday.

“Inflows into these funds have surged by nearly 8,364 per cent over the last five years at Rs 18,117 crore in August 2024, up from a meagre Rs 214 crore in August 2019. Inflows have increased by nearly 251 per cent since the beginning of this fiscal up from Rs 5,166 crore in April 2024. The total assets under management (AUM) under these funds witnessed over seven-fold increase at Rs 4.45 lakh crore in August 2024, up from Rs 59,239 crore in August 2019,” ICRA Analystics said in the report.

There are 120 thematic funds and 65 sectoral funds in all at present. The compound annualized returns on thematic funds are 46.06 per cent for 1-year, 21.29 per cent for 3-years, 24.07 per cent for 5-years and 16.85 per cent for 7-years; while the same for sectoral fund is 44.66 per cent, 20.53 per cent, 24.77 per cent and 16.95 per cent for 1-year, 3-years, 5-years and 7-years respectively, it added.

Ashwini Kumar, senior vice-president and head market data, ICRA Analytics, said, “Investors, particularly in the retail segment, are seeking new growth opportunities and are exploring avenues to generate alpha or higher returns. This explains the heightened activity in such funds, which has witnessed a seven-fold rise in AUM over the last five years. Such funds are suitable for those investors who understand the dynamics of specific sectors or themes and can accordingly evaluate their growth prospects and risk-taking ability effectively. Hence it is imperative that investors stay updated about the latest market trends and economic developments and make well-informed investment decisions.”

The government has been extending support to areas such as public sector undertakings, defense, railways, energy, and shipbuilding, and this has encouraged fund houses to launch new funds across these categories. As many as 23 new thematic funds and 5 new sectoral funds have been launched so far since the beginning of this calendar year.

“However, such funds come with a bias as they are inclined towards a theme or sector. In case the concerned sector/theme experiences some headwinds, then the entire fund may start to underperform as they have high exposure to a particular sector. This is in stark contrast to a diversified fund as it has exposure to multiple sectors and is well insulated from such sectoral shocks even though not completely immune to it,” ICRA added.

“It is therefore important that investors monitor the sector on a continuous basis and rebalance portfolios regularly based on market developments,” Kumar said.

Equity mutual funds continue to witness strong momentum

Inflows into equity mutual funds witnessed a strong momentum for the fifth consecutive month since the beginning of this financial year. Inflows were up by nearly 89 percent at Rs 38,239 crore in August 2024, up from Rs 20,245 crore last year. On a month-on-month basis, inflows were up by around three per cent from Rs 37,113 crore in July 2024.

Net inflows into the mutual fund industry surged by over seven times at Rs 1,08,123 crore in August 2024, as compared with Rs 14,385.93 crore last year, as retail investors who are bullish about the country’s growth prospects and positive sentiments continued to remain invested. On a month-on-month basis, however, net inflows dropped by nearly 43 percent from Rs 1,89,043.70 crore in July 2024, primarily on account of a 62 percent drop in inflows into debt mutual funds, according to the ICRA report.

“The resilient domestic financial market and positive sentiments seem to be auguring well for the Indian mutual fund industry. This is reflected in the higher inflows into equity mutual funds which surged by over 89 percent on a year-on-year basis,” Kumar said.

However, a cautious undertone is likely to prevail as investors look ahead to key macro data for directional cues both globally and domestically. Incoming domestic macroeconomic data are expected to offer essential insights into the condition of the Indian economy and may significantly influence the Reserve Bank of India’s (RBI) upcoming monetary policy decisions, Kumar said.