Almost half of the equity mutual fund inflows in the first half of FY25 have gone into sectoral/thematic funds, a trend that experts say warrants caution, as much of these inflows could be coming from new investors.
Equity mutual funds saw inflows of Rs 2.04 lakh crore in the first six months of the current financial year, more than triple compared to the corresponding period last year.
Of this, 47.3% or Rs 96,489.33 crore went into sectoral/thematic funds with a deluge of new fund offers (NFOs) fuelling the flows, data from the Association of Mutual Funds in India showed.
As many as 22 of the 30 active equity NFOs launched in the first half of the year were sectoral/thematic funds. These 22 NFOs mobilised more than Rs 51,000 crore or 53% of the total funds that went into sectoral/thematic funds.
“Investors should note that while investing in this category can be highly rewarding in the short-to-medium term, it comes with relatively higher risk as one has to get the timing of entry and exit right in a sector fund, especially the ones which are narrow and dominated by a top-down view,” said Abhishek Tiwari, chief business officer of PGIM India AMC.
Melvyn Santarita, analyst – manager research at Morningstar Investment Research India, shared a similar view. “Robust net inflows into NFOs point towards their continued appeal among investors. However, investors should be cautious while selecting funds, especially from the sector/thematic category,” he said.
Compared to around 1.7 million new monthly systematic investment plan (SIP) account additions in FY24, the first half of FY25 saw an average addition of 2.5 million. As of September 30, there were 99 million SIP accounts.
Manufacturing, special opportunities and business cycle funds are among sectors/themes that have attracted investors.
Even on the passive side, NFOs based on sectors and themes have been launched. These include funds on private banks and financial services, defence and tourism.
Fund flows into the small-cap category declined 29.3% during H1, but mid-cap funds saw a nearly 36% jump in inflows.
Experts said high valuations in the small-cap space could have slowed inflows in the category. Late last year, the Securities and Exchange Board of India (Sebi) raised concerns over excess valuations in the broader market. This led to outflows from the small-cap funds category in March.
On the other hand, pure large-cap funds, which had seen outflows of Rs 5,699 crore during the first half of FY24, witnessed inflows worth Rs 7,067.54 crore this year.
While the broader market has managed to outperform the benchmark indices in FY25 despite valuation woes, some of the popular themes/sectors like defence and public sector banks have seen bouts of extended correction after a stellar rise in the last couple of years.
Experts said a new investor entering some of these narrow themes could end up with her leaving the market with a bitter experience.