The Hottest Mutual Fund Category May Not Be The Best For You

Nearly three out of every four new actively managed schemes launched during the current calendar year are from this category.

"Investors are flocking towards the category based on the promise of high returns such as those delivered during the past few years," Kshitiz Mahajan, managing partner at Complete Circle Wealth Solutions, said.

"The expectation of continued returns based on the recent performance may be misleading people," he added.

The ongoing bull run in the Indian equity markets has significantly boosted the performance of mutual fund schemes. In this environment, sectoral/thematic funds have consistently emerged as top performers, delivering stellar returns that have caught the attention of investors and fund managers alike.

Of the 34 new actively managed funds launched till July this year, 25 have been in the sectoral/thematic category, outpacing every other category.

The robust returns, coupled with a steady increase in fund inflows and continued launches of new funds within this category, have propelled sectoral/thematic funds to new heights.

As of July 2024, the total assets under management for sectoral/thematic funds stood at Rs 4.21 lakh crore, making it the largest among actively managed mutual fund categories. This growth has even surpassed that of flexicap funds, which had previously held the top spot until June.

"A large part of the category's popularity might be from the way new fund offerings are presented," said Prableen Bajpai, founder of FinFix Research and Analytics Pvt.

"The way these funds are advertised with a narrative around a theme, whether it be through manufacturing, relating it to the 'Make in India' theme, or that of growing infrastructure in the country, investors become driven to support these ideas," she said.

As equity markets continue on a steady growth trajectory, investors' risk appetite also inches higher, eventually looking beyond standard products and into more "adventurous options," she said.

Despite the attractive returns, fund managers urge caution when it comes to investing in sectoral/thematic funds.

Mahajan recommends that investors allocate between 10-15% of their portfolio to this category, depending on their risk tolerance.

"People should revisit their allocations even in the scenario where unprecedented returns are being made," he said.

Moreover, Mahajan highlighted the role of compounding, which benefits more from time spent invested than the rate of returns.

Among sectoral/thematic funds, Bajpai suggests looking at thematic funds rather than pure sector plays, as themes may be slightly more diversified.

She also suggests looking at funds that have been through multiple market cycles in order to compare not only the returns made during the best periods but also the worst periods.

HDFC Infrastructure Fund fell over 33% over the span of a one-year period as of October 2018.

While theoretically, it may seem easy to accept such a drop, looking at one's own savings slide in value leads to investors accepting losses and exiting these investments early, she said.