Sectoral fund inflows soar 1,882% MoM: A smart move or costly mistake by Indian retail investors amid Trump tariff war?
The sectoral funds, grabbing the highest 15% share, recorded a whopping 1,882% increase month-on-month. The small-cap category recorded a 61% MOM growth to ₹ 6,484 crore, and commanded 10% of the overall inflows. This retail investor behaviour demonstrated both the strong attraction of past performance as well as the willingness to take risks.
But is this a wise strategy for investors as tariffs unleashed by Donald Trump threaten to derail the Indian stock market?
Taking historical data into consideration, analysts do not believe that it's a wise decision — especially for retail investors — to take concentrated positions in sectoral funds.
Dr VK Vijayakumar said that while robust equity fund flows reflect the optimism of retail investors, the inflows into sectoral funds are signalling an unhealthy trend. "We know from experience that in the long run, thematic funds underperform. Not only do they underperform, but they're also highly risky," Dr Vijayakumar said.
The newbies who have flocked into the market after the COVID crash are totally unaware of these market nuances, and that explains the inflows in this segment, he added.
The last one-year returns of funds in the sectoral and thematic categories range from 19% to -17%, signalling that not all sectors perform equally. There are always outperforming sectors, neutral ones, and underperforming sectors.
Echoing similar views, Ajit Mishra, SVP-Research, Religare Broking, said that sectoral funds are highly risky and if a particular sector takes a hit, it becomes very difficult to manage those positions.
"We've seen such cases in the past with sectors like IT and pharma. Both underperformed for long periods, and IT is still facing pressure. So clearly, it's not a great strategy for retail investors. It should be more of a balanced approach," he advised. He explained that sometimes, people take short-term tactical positions —say, in defence-related stocks. But it's not a sound strategy for retail investors.
However, amid Trump's tariff tantrum, G Chokkalingam, Founder of Equinomics Research, believes a sectoral approach is more relevant than ever. While sector-based investing has always mattered due to uneven performance across industries, this time, unique macro and domestic factors make it critical, he said.
What makes this time different? Chokkalingam pointed to two key reasons:
Trade War Impact: 'We haven't seen a global trade war of this scale in the last two to three decades,' he said. The implications are deeply sector-specific. For instance, textiles are among the worst-hit, followed by gems and jewellery. While US tariff hikes are broadly applied (25% across the board), for emerging markets like India, only select sectors—such as textiles and pharma—face the brunt.
Shifting Domestic Trends: On the home front, traditionally defensive sectors like FMCG are faltering. Once a safe haven during downturns (even during the Lehman crisis), FMCG now shows consistent underperformance. Similarly, the auto sector is largely flat across segments, barring a few exceptions like M&M's tractor division. Two-wheelers and other categories continue to struggle with low growth.
"Therefore, I believe mutual funds launching sectoral schemes are being smart, and investors opting for them are also quite aware of the current dynamics," Chokkalingam opined.
However, he also advised against putting all your funds into one category. "If investors choose sector funds, they must diversify within the equity asset class. Unless they're professionals or have very high risk appetite, they should not allocate a major chunk of their equity investment to one sector," he advised. Don't put 50–100% of your equity portfolio in one sector fund, limit it to 15–20%, unless you have an extremely high risk tolerance, he said.
Now, the question remains with Trump's massive tariffs on India (25% already in effect and another 25% to come into effect later this month on August 27), if Indian equity inflows can hold ground.
Ajit Mishra of Religare said that last month, inflows were more of FOMO factor. "By June, we were talking about the market hitting new highs, and in July, that sentiment carried over. So yes, this could be a classic case of FOM, especially in small caps. Investors probably felt like they were missing the bus. But now, with earnings coming in, the reality is setting in. You could see some moderation in the numbers — particularly in the small- and mid-cap segments. Ultimately, earnings performance will drive the narrative," he said.
However, Sunil Subramaniam, stock market veteran, believes strong buying support in equities will continue in August as nearly ₹ 57,000 crore (assuming 65% of Hybrid and 80% of Passives is in Equities) will be available to mutual funds to defend our market against the fluctuating FII behaviour.
Disclaimer: This story is for educational purposes only. The views and recommendations expressed are those of individual analysts or broking firms, not Mint. We advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and circumstances may vary.
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