Nearly 40% of the equity schemes launched this year by asset management companies have been thematic or sectoral funds. Fund houses have hit the market with a total of 109 equity new fund offerings this year, of which 40 are thematic or sectoral funds. Such funds have mopped up Rs 10,800 crore, or around 40% of the total equity NFO collection of Rs 27,300 crore, data from Value Research show.
HDFC Mutual Fund last month launched HDFC Business Cycle Fund with a focus on riding business cycles through dynamic allocation between various sectors and stocks at different stages of the cycles. Such funds are meant to outperform by buying cyclical sectors during an upturn and defensive sectors during a downturn to generate better returns.
In October, IDFC Mutual Fund announced the launch of the IDFC Transportation and Logistics Fund, an open-ended equity scheme investing in transportation and logistics sector, intending to benefit from the multi-year growth opportunity in the mobility services sector.
“Rapid urbanisation is accelerating growth in personal mobility requirements. Additionally, powerful enablers like a strong demand-led recovery cycle and margin improvement provides visibility for strong earnings growth for the transportation and logistics sector. Growth in this sector is expected to be driven by rising aspirations, enhanced infrastructure, a surge in volumes and export-driven opportunities,” the fund house’s chief executive Vishal Kapoor had said during the launch.
“We have seen a fair bit of sector rotations in the past year, with some sectors making a strong comeback. The Nifty Bank index, for instance, has been making new highs amid strong flows from institutional investors in banking and financial stocks. Sectors such as pharma and FMCG have gained traction among investors amid talks of a global recession,” Amol Joshi, founder of Mumbai-based Plan Rupee Investment Services, said.
In 2017, the Securities and Exchange Board of India (Sebi) had issued guidelines of 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.
“Fund houses want you to believe that a particular theme or sector is likely to be the next silver bullet which is going to deliver stellar returns. But the fact remains that most of the launches remain predominantly an asset-gathering exercise,” said Vicky Mehta, an independent analyst who tracks mutual funds.
Between sector and thematic funds, the latter has seen more traction among manufacturers. While sector funds have to restrict themselves to investing in a particular sector, thematic funds have a wider investment universe to choose from, allowing fund managers to invest across industries.
“Since the investment mandate is a bit more liberal, it gives a little more breathing space to fund managers. Managers can switch between sectors within the same theme or invest in an ancillary sector. Creating stories around thematic funds and selling it to investors is also easier,” Mehta said.
Experts believe that diversified funds are a better alternative to thematic funds as fund managers have the option to go overweight or underweight on different sectors or themes at a time.
“With a thematic or sector fund, investors need to enter and exit the fund at the right time. With a diversified fund, when one theme runs its course the fund manager can always turn to another theme and investors can stay put for the long haul,” Mehta added.
Joshi says he does not advocate sectoral and thematic funds to investors as it is difficult to get the timing of the entry and exit right. In 2006-07, for example, several infrastructure funds gave stellar returns but lost of most their gains in the aftermath of the 2008 crash and took nearly eight years to recover. Several digitally-savvy millennials who are also into direct investing are turning to such funds in search of higher returns, according to Joshi.