Why are investors shying away from sectoral and thematic mutual funds in 2025?
Mumbai: Equity mutual fund schemes that bet on sector and focused themes - the hot picks of 2024 - are falling out of investor favour amid erratic returns and heightened risk.
Net inflows into
sectoral and thematic funds
, which averaged ₹15,340 crore a month from June to December 2024, have dropped to an average of ₹1,408 crore for the three months from March to May 2025.
"Several investors who have been mis-sold these funds, and did not understand the risks, now seem to be liquidating them," says Vicky Mehta, an independent mutual fund analyst.
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Mutual funds raised record money from
retail investors
through New Fund Offers (NFOs) in segments like defence, tourism, capital markets, energy, manufacturing, innovation, transportation and logistics, automotive, internet economy, realty and many others.
As regulations prevent fund houses from operating more than one scheme in each equity category, the industry has found a way around the rule by launching schemes based on various themes.
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"A lot of money in sectoral and thematic funds was raised through NFOs from large fund houses, which were lapped up by investors due to unique propositions," says Dheeraj Gaur, CEO, Arete Capital.
Investors were, however, not prepared for the sell-off that began in the last week of September.
Sectoral and thematic funds tend to be more volatile than diversified equity funds and often witness sharp falls during market sell-offs.
For example, the defence index fell 23% between November 28 and February 28, while the realty index lost 21.2% in a single month between December 27 and January 27. Since February 28, the defence index has rebounded by over 70%, while the realty index has risen by about 20%.
Many investors could be using the bounce to liquidate their sector fund holdings.
Mehta believes informed investors who understand when to get in and out of sector funds should consider such funds, while retail investors are better off staying away and avoiding fresh allocations.
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