Sectoral funds rule the roost in December 2024 but are they worth the risk?

The sectoral and thematic fund category, which witnessed the closing of 12 new fund offerings (NFOs) in December, contributed Rs 15,332 crore to the equity inflow tally

Sector or thematic funds continued to rule the roost in December 2024 as these mutual funds garnered net assets worth Rs 15,332 crore during the month, as per data released by AMFI However, this also includes Rs 11,337 crore garnered by 12 new sector or thematic funds launched in December.

 

Thematic funds in India are a type of mutual fund that invests in specific sectors, themes, or trends rather than following a broad market index. These funds focus on particular themes such as technology, healthcare, infrastructure, or consumption, aiming to capitalize on growth potential in those areas. Sector and thematic funds allocate at least 80 per cent of their portfolios to stocks within a specific sector or theme. While thematic funds are usually more diversified than sector funds, they, too, are more concentrated than diversified equity funds.

 

 

Led by 12 new fund offers (NFOs), the sectoral and thematic mutual fund category witnessed a surge of 100% on a monthly basis to Rs 15,332 crore from Rs 7,657 crore in November.The 12 new sectoral and thematic funds contrinuted 83% to the total mobilisation by 33 open-ended NFOs of Rs 13,643 crore. The new funds launched in the month are Aditya Birla Sun Life Conglomerate Fund, Axis Momentum Fund, Bajaj Finserv Healthcare Fund, Bank of India Consumption Fund, DSP Business Cycle Fund, ICICI Prudential Equity Minimum Variance Fund, Kotak Transportation & Logistics Fund, PGIM India Healthcare Fund, Quantum Ethical Fund, SBI Quant Fund, Shriram Multi Sector Rotation Fund, and Union Active Momentum Fund.

 

In 2025, emerging themes such as Artificial Intelligence, Electric Vehicles, and rural development are expected to gain traction.

 

But are such sectoral funds worth the risk?

Investing in sectoral and thematic funds can be a rollercoaster ride of thrilling highs and perilous lows. As such, it’s crucial for investors to approach these funds with a measured sense of caution. Simply jumping into a new fund based on hype or attractive historical returns can lead to costly mistakes, as past performance does not guarantee future success.

 

Sectoral and thematic funds focus on specific industries or investment themes, making them suitable primarily for seasoned investors. Those who can assess growth prospects, valuations, and the inherent risks of a particular sector are best positioned to benefit. Successful investing in these funds often hinges on the ability to make timely decisions regarding entry and exit points—timing is essential for maximizing gains and minimizing losses.

 

"Sector/thematic funds are typically cyclical in nature and are largely meant for investors who either are in a position to track a sector or understand the dynamics of a given theme, or they have resources at their disposal to do that form them. It’s important to time their entry and exit from these funds as they can tend to be very volatile. They offer a very high-risk high return investment proposition and investors should be vary of that while investing in them. Given in the recent times some of the sector funds have delivered good returns, that has attracted investors. However, investors should observe caution while investing in these funds," said  Himanshu Srivastava – Associate Director- Manager Research, Morningstar Investment Research India.

 

Companies in these sectors/themes go through their own economic and business cycles. When the cycle is favourable, they can deliver huge profits. But cyclical downturns also adversely affect their performances. 

 

Investors with limited knowledge or those who base their choices solely on past performance should reconsider their strategy. A shift to diversified equity mutual funds could be a smarter move, allowing for a balanced approach that aligns with financial goals, risk tolerance, and investment timelines. This method can help mitigate the impact of market downturns and achieve consistent returns across various market cycles.

 

"If you have a high-risk appetite, willing to accept market volatility in pursuit of higher returns, and have a long-term horizon of 5-7 years or more, you may consider adding some well-researched and promising sectoral or thematic funds to your portfolio.

 

However, these should ideally be held in the satellite portion of your equity portfolio, with a small allocation of up to 10-12%. This allocation can provide the opportunity for potential alpha generation while containing the overall risk within your portfolio.

 

Your core equity mutual fund portfolio should mainly consist of some of the best Large Cap Funds, Flexi-cap Funds/Multi-cap Funds, and Value/Contra Funds. Here too, an investment horizon of around 5 years is prudent to allow the funds to realise their full potential and steadily multiply your wealth," said Mitali Dhoke, a research analyst at PersonalFN. 

 

Dhirendra Kumar of Value Research advices investors to opt instead for well-diversified funds like flexi-cap funds as sectoral and thematic funds have historically blown hot and cold because they rely on the performance of one sector or theme.

 

Multi-cap and large-cap funds are two other examples of diversified mutual funds. You can choose to invest in them based on your risk profile.