Thematic funds continue to mobilize highest net inflow MoM; should you also bet on this equity mutual fund category?

In April 2024, thematic or sectoral funds continued to lead the equity mutual fund category with net inflows to the tune of Rs 5,166 crore, which is the 5th best amount mobilized in 3 and 5 years but down 35 per cent from 3-month average, noted Geojit Insights. The same was still high in the final month of FY2024 at Rs 7,917.72 crore.

Commenting on the high interest in the category, Jaiprakash Toshniwal,Senior Equity Research Analyst & Fund Manager – Equity- LIC Mutual Fund Asset Management said investors are being drawn to thematic funds for focused exposure to specific trends, government policy, potentially yielding higher returns. These funds offer diversification within themes, capitalize on long-term trends, and align with investors' values. They cater to those seeking growth opportunities while reflecting their beliefs, such as sustainability or technological innovation. 

Some of the investors having their circle of competence to the specific theme also tend to invest in these funds, he added.

What are thematic/ sectoral funds?

While there is a thin line of difference between sectoral or thematic funds. For a clear understanding, sectoral funds may be targeted at one particular sector, say information technology as an example and within that as a theme-fund managers may target a specific theme supposing AI or artificial intelligence?

How thematic funds have performed over the past 5 and 10 year period?

Over the past 5-year period, themes or sectors like PSU and infra space have dominated with some of the mutual funds offering annualised returns of up to 38 per cent. While, in the 10-year period, sectors or themes like digital, PSU and consumption-focused themes have emerged as winners offering gains of up to 23 per cent.

“In recent years, we've witnessed the emergence of mega-themes like Manufacturing, Power, and Consumption, driven by factors such as government policies, technological advancements, and demographic trends. Certain companies adeptly leverage these sectoral tailwinds, fostering a virtuous cycle of market share expansion, sales growth, and profit increases. This has led to substantial wealth generation for investors,” Toshniwal reasoned. 

Are thematic funds suitable for all investor categories?

Himanshu Srivastava, Associate Director – Manager Research, Morningstar Investment Research India Private Limited said as these are not one of those funds which are apt for all type of investors. Given they are concentrated on one sector or few specific themes, they carry relatively higher risks. These funds are not tailored to change their structure and positioning if the underlying sector or theme is out of favor, the benefit that other more broad-based funds bring to the table.

The aptness of such funds in the investment portfolio should also be evaluated to understand what value add they bring to the portfolio and also in what way they complement other funds in the portfolio.

Echoing a similar view Toshniwal added  it's crucial for investors to acknowledge the inherent high-risk, high-return nature of these strategies. Understanding the potential volatility and conducting thorough research are essential for navigating such a dynamic investment landscape.

Further, Srivastava noted that investors should be a bit more vigilant while investing in thematic funds because very often their investment mandate is very fluid and broad, and hence offer nothing unique in contrast to other established and tenured equity diversified funds.

How can one expect thematic/ sectoral funds’ performance to be down the line given current market dynamics?

Toshniwal remarks thematic funds’ performance hinges on investee company profit growth and the longevity of tailwinds within the specific theme. Predicting performance is challenging due to these uncertainties. 

The fund's success relies on the sustained profitability of companies aligned with the theme and the enduring relevance of the underlying trend, factors subject to market dynamics and unforeseen events, he adds.

Which themes offer good potential for a horizon of say 5-7 years given the current market dynamics?

According to Anil Ghelani, D SP Mutual Fund's-Head - Passive Investments & Products, two themes with good potential for the next 5 years would be Consumption and BFSI. This view got a boost earlier this year, from the Interim Budget balanced on a pillar of three “Cs” - Consumption and Capex, with Consolidation. This has helped with a base for long-term sustainable potential for these two themes, amongst many other areas.

It was famously quoted that the American roads are not good because America is rich, but America is rich because American roads are good. As the infra capex spending budgeted for Rs 11.11 lakh crore is implemented, it will create wider economic growth and job creation which could lead to higher consumption. As we see various long-term employment opportunities, young aspiring population will consume more. This will soon move beyond consumer staples to consumer discretionary such as spending for automobile, travel, luxury goods, etc, he adds.

Connected with that, a robust banking and finance system functions as the heart and lifeblood for economic growth and development, especially for a fast-growing country like India. The sector has been relatively undervalued in the recent past which is expected to see value unlocking with this potential growth, the expert highlighted.