Sectoral, thematic schemes corner one-sixth of equity flows 

One in six rupees put in by investors in equity schemes has gone into sectoral or thematic schemes in the past year.

The schemes have seen inflows of ₹22,837 crore, second only to small-cap funds and nearly 18 per cent of the total equity flows in this period. Nearly 75 per cent of the flows have come in through new fund offerings. The September quarter saw investors pumping in ₹9,381 crore, accounting for 41 per cent of the flows.

ICICI Prudential Transportation and Logistics Fund was the largest thematic offering (₹2,402 crore) in the last one year, followed by HDFC Business Cycle Fund (₹2,336 crore) and Axis Business Cycles Fund (₹2,089 crore), data from Value Research shows. Top sectoral offerings include HDFC Technology Fund (₹661 crore), Bandhan Financial Services Fund (₹541 crore) and Kotak Banking & Financial Services Fund (₹454 crore).

Retail flows

Retail flows are often driven by near-term performance and the current flavour of the season, especially when the markets are on an upswing.

“New offerings are typically launched when the mood is upbeat. It’s easier for fund companies to weave a story around a theme and sell it as the next big thing,” said Vicky Mehta, an independent mutual fund research analyst.

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Bank-sponsored asset managers have piggybacked on their distribution network to sell these schemes, according to experts. Investors, however, shouldn’t invest in such offerings unless it is something unique.

“I am not a great fan of thematic investing as markets are cyclical and the entry and exit for such investments need to be timed perfectly. Even if the offering is unique, investors need to ensure that it fits into their current portfolio and overall asset allocation,” said Kirtan Shah, Founder, Credence Wealth Advisors.

The IT theme did really well post-Covid up until mid-2021, after which the tide began to turn. In 2006-07, infrastructure funds were the flavour but lost out in the aftermath of the global financial crisis.

Risky affair

“These funds are like one-trick ponies and will do well so long as the underlying sector or theme outperforms,” said Mehta. “Investors will be better off investing in a diversified fund where fund managers have the option to go overweight or underweight on different sectors or themes at a time.”

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Thematic funds have seen more traction among manufacturers as they offer broader investment opportunities than sector funds. The investment universe of these funds, however, is still considerably restricted than diversified funds.

Shah says such funds are more suited to professional investors who understand market cycles and are seeking a larger allocation to certain sectors, say IT and pharma, than what’s available in diversified funds.

In 2017, SEBI had issued guidelines for categorisation of schemes. According to these norms, fund houses could launch only one fund per category. There was no cap, however, for index, thematic and sectoral fund launches.

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