Sectoral and thematic mutual funds have drawn the highest investor attention in over a decade. According to Franklin Templeton’s Mutual Fund Industry Dashboard for September 2025, money has poured into schemes focused on defence, public sector enterprises (PSUs), manufacturing, and energy transition themes that now dominate the equity inflow table. Over the past twelve months, these funds together received Rs 69,235 crore in net inflows, the largest among all equity categories, the report said.
This marked a sharp turn from the earlier retail preference for diversified flexi-cap or large-cap funds. The surge, Franklin Templeton noted, came as investors sought to ride long-term government and policy-linked growth stories.
The overall mutual fund industry’s assets under management (AUM) stood at Rs 75.61 lakh crore in September 2025, up 12.7% year-on-year. Within that, equity-oriented AUM grew 9.5% to Rs 55 lakh crore, while fixed-income AUM rose 22.2% to Rs 20.61 lakh crore.
Sectoral funds in focus: investors chase visible growth stories
Franklin Templeton’s dashboard showed a clear behavioural shift. Sectoral and thematic funds, often considered niche or cyclical, have turned mainstream. The top-performing themes defence, manufacturing, PSUs, and energy transition, benefited from policy tailwinds, capacity expansion, and a surge in domestic investor participation.
“The themes attracting investor flows mirror India’s changing growth composition,” the report said. “Government-driven reforms, manufacturing push, and defence indigenisation have encouraged thematic participation.”
Defence-related funds, which barely existed five years ago, now hold multi-thousand-crore portfolios across asset managers. PSU-focused schemes, once considered slow-moving, have gained from both dividend yields and strong price performance in banking and energy names.
Record equity inflows sustained by retail investors
Equity funds continued to receive steady inflows despite volatile markets. September 2025 marked the 55th straight month of positive equity inflows, highlighting sustained retail confidence.
Systematic investment plan (SIP) flows hit a new record of Rs 29,361 crore in September, up from Rs 24,870 crore a year earlier a rise of nearly 20%. The report said the expanding SIP base reflected “stickier” retail money, with over 7.9 crore active SIP accounts as of the month-end.
Franklin Templeton said SIP participation was spreading beyond metros, with 60% of new registrations coming from non-Tier 1 cities. “This diffusion of participation has reduced concentration risk and made inflows more stable across market cycles,” the note added.
Thematic strategies ride on economic policy alignment
The preference for sectoral and thematic funds coincided with India’s push for manufacturing-led growth. Capital expenditure, defence procurement, and renewable energy transition have all become investable stories.
Manufacturing and infrastructure themes gained traction after the government’s production-linked incentive (PLI) push and rising private capex. Defence-related portfolios grew alongside order visibility for companies in shipbuilding, aerospace, and electronics.
Franklin Templeton said the thematic rotation was not merely speculative. “The market is now rewarding earnings visibility within identified policy themes,” the report observed. “Unlike earlier cycles, investors are aligning allocations with multi-year structural reforms rather than short-term sector rotation.”
Energy transition funds also gathered interest, anchored by India’s 2070 net-zero commitments. Schemes investing in renewables, EV supply chains, and grid technology contributed to inflows within the thematic basket.
Retail and HNI flows drive overall industry AUM
India’s mutual fund industry AUM rose to Rs 75.61 lakh crore in September, up from Rs 67.05 lakh crore a year earlier, driven by higher equity valuations, fresh inflows, and new fund offers (NFOs).
Equity-oriented schemes held Rs 55 lakh crore, while debt-oriented schemes accounted for Rs 20.61 lakh crore. Passive products, including ETFs and index funds, had combined assets of Rs 12.65 lakh crore, up 12.9% from a year earlier.
Franklin Templeton said the rise in AUM reflected a deeper domestic investor base. “Mutual fund ownership of equities has increased steadily, providing a counterweight to institutional and foreign flows,” it said. The share of mutual funds in India’s total market capitalisation has risen from 8.1% in 2020 to over 10.4% in 2025, the report added.
Manufacturing and PSU themes see the sharpest pickup
Within sectoral funds, manufacturing and PSU categories saw the sharpest jump in assets. The manufacturing theme gained from listed capital goods, auto ancillaries, and infrastructure stocks that benefited from the capex cycle.
PSU-focused funds, meanwhile, rode on dividend visibility and strong price action in public sector banks and energy companies. Defence allocations expanded with rising order books and faster procurement cycles.
“Flows into PSU and manufacturing funds reflected both earnings upgrades and improved investor perception,” Franklin Templeton said. The brokerage added that several new thematic NFOs during the year had mobilised over Rs 18,000 crore, indicating strong demand for focused investment stories.
Balanced advantage and large-cap funds lag
In contrast, diversified categories such as balanced advantage and large-cap funds saw lower inflows. Balanced advantage funds, which adjust equity-debt allocation dynamically, recorded a 12-month net inflow of Rs 18,544 crore, far below the thematic surge.
Large-cap funds drew Rs 11,785 crore, while flexi-cap schemes received Rs 25,320 crore. Mid- and small-cap categories together added Rs 40,400 crore, but monthly trends showed moderation as valuations turned richer.
Franklin Templeton noted that investors were “increasingly selective, preferring defined themes or active mid-cap opportunities over broad-based large-cap exposure.”
Fixed-income revival adds stability
While equity dominated headlines, the fixed-income segment quietly staged a revival. Debt AUM grew 22.2% year-on-year to Rs 20.61 lakh crore, aided by a stable rate outlook and demand for short-duration and corporate bond funds.
Overnight and liquid funds attracted institutional money ahead of quarter-end reporting, while target maturity funds remained popular with retail investors seeking predictable returns.
Franklin Templeton said bond flows stabilised the overall asset mix, reducing volatility in total AUM. “Balanced retail and institutional participation has given mutual fund assets a more stable growth trajectory,” it said.
Passive investing grows but faces competition from active themes
Passive products, though still expanding, now face competition from active thematic strategies. Index funds and ETFs together reached Rs 12.65 lakh crore in AUM, up 12.9% from a year earlier. However, their incremental inflows were lower than the surge in sectoral funds.
“Thematic and sectoral schemes offered investors differentiated exposure that index products could not match,” Franklin Templeton said. It noted that investors were using both ETFs for core allocations and thematic funds for tactical positions.
SIPs, retail depth and financialisation
Franklin Templeton highlighted the continuing financialisation of savings as the main driver of sustained inflows. The number of SIP accounts rose to 7.9 crore in September, with the average ticket size increasing to Rs 3,720 per month.
Retail investors accounted for over 55% of equity AUM, up from 50% three years ago. “The participation base has widened significantly, with Tier 2 and Tier 3 centres contributing over half of new SIP registrations,” the report said.
It added that consistent SIP growth had helped the industry weather market volatility and maintain stable monthly inflows.