The sectoral and thematic funds category of equity mutual fund schemes, which has seen an increase of nearly 130% in its assets under management (AUM) from 2023 and contributes to nearly 15% of the total equity AUM, has underperformed the market returns both over a one-year and three-year periods.
An analysis of data from Value Research shows that thematic funds across various categories on an average have given returns of -1.7% in the past one year and -16.33% in the past three years as of December 11. During the past one year, the large cap benchmarks Nifty and Sensex have risen 4-5% and the 500 stock indices of both the exchanges have risen between 0.6-0.8%.
Over a three-year period, while large cap benchmarks have risen nearly 40%, broader 500 stock indices have also gained between 46-49%. In the sectoral schemes as well, the average one-year return has been 4.5% and 17% in the past three years.
What did Prateek Nigudkar say?
Prateek Nigudkar, senior fund manager, Shriram AMC said, “Sector-specific funds often see investors entering at the wrong point in the cycle—typically near the peak—which makes them sub-optimal investment vehicles for most people.”
The number of schemes in this category has also risen from 145 in November 2023 to 245 at the end of November this year. According to industry experts, this was driven by Sebi rules introduced in 2022 that prohibited asset management companies from offering two schemes under different names with identical investment mandates. As a result of this mandate, the fund houses had to realign their schemes and portfolio to classify them under the newly formed categories. The distributor also gets a higher commission from mutual funds to sell the new themes.
What did Nilesh D Naik say?
Nilesh D Naik, head, investment products, Share.Market (PhonePe Wealth) also said sectoral funds such as these are typically meant for seasoned investors who have their core portfolio in place and who want to take a tactical bet based on their views on a specific sector or theme.
He added that while equity as an asset class tends to be highly volatile, historical data suggests that the broad-based equity portfolios or indices typically tend to recover within 2-3 years after the market fall, compared to sectoral or thematic portfolios which may often take several years or even over a decade to recover.
Among the themes with maximum returns over a three-year period are PSU, manufacturing, and infrastructure, with returns between 20-24% and average one year returns of all themes have been negative. In sectors, auto and transportation have given a return of 28.33% over three years but the Nifty Auto index has risen more than 100%. The average banking sector schemes have given returns of nearly 13% in one year as well as three years, and the pharma sector schemes on an average have given returns of 22% in the past three years and 0.7% in the past one year. Meanwhile, technology sector schemes have given one year returns of -11% on an average and -13.5% in three years.
Nigudkar added that a significant portion of Shriram AMC’s portfolio is positioned in energy, though we have partially booked profits. “We are also constructive on autos and auto ancillaries—particularly four-wheelers—which should benefit from recent fiscal and monetary measures as well as the upcoming government employee wage revisions,” he said and added that it is also positive on the power sector.