As sectoral/thematic funds continue to garner record flows from investors, an analysis of their returns show that 80% of the top 10 funds and around 43% of the overall funds underperformed their benchmarks in the last one year.
The top performing fund in the category in the last 1 year – HDFC Defence Fund – gave 84.1% return. However, its benchmark Nifty India Defence Total Return index has surged 103.5% in the same period.
Among other top funds are those invested in infrastructure and PSU themes. These too have underperformed their benchmarks.
Andrew Holland, CEO of Avendus Capital Alternate Strategy, said the data does not surprise him. “This is the reason why Exchange Traded Funds (ETFs) are picking up worldwide,” he said.
Experts said narrow theme of some sectors and themes could have driven the underperformance of active funds.
“If new investors are starting with thematic funds, it is dangerous…. Asset allocation is a very under-rated strategy. One has to go back and balance their portfolio rather than chase the hot sectors/themes,” said Madhu Nair, CEO at Union Mutual Fund.
Nair, though, said active funds still have a better chance of beating the benchmarks. “If you tell me 50% of the active funds have underperformed, it means there is still a 50% chance for outperformance. That is still better than index funds,” he said.
“I have always maintained this that fund launches have to be driven by investment argument rather than demand or sales argument,” he said.
As per ICRA Analytics, inflows into these funds have surged by nearly 8,364% over the last five years at Rs 18,117 crore in August 2024, up from a mere Rs 214 crore in August 2019.
Experts said investors should look at longer period returns before investing in sectoral/thematic funds rather than last one or two year returns.
“The compounded annualized returns on thematic funds are 46.06% for 1-year, 21.29% for 3-years, 24.07% for 5-years and 16.85% for 7-years; while the same for sectoral fund is 44.66%, 20.53%, 24.77% and 16.95% for 1-year, 3-years, 5-years and 7-years respectively,” ICRA said.
Experts said stock selection too becomes crucial when it comes to sectoral/thematic funds. While state-owned banks have done well in the last couple of years, their private peers have languished, they said.
The data showed that funds-focused on financial services space have been the worst performers within the sectoral/thematic funds category in the last one year given their heavy exposure to private banks.
Ashwini Kumar, senior vice president and head market data at ICRA Analytics, said that sectoral/thematic funds are suitable for those investors who understand the dynamics and can accordingly evaluate their growth prospects and risk-taking ability effectively.
