Music themes are good but thematic funds may prove injurious to investors
Subscribe to enjoy similar stories. What do you think when you see a slew of new fund offers (NFOs) from various mutual funds or portfolio management services (PMS) providers centred around a particular theme? Over the past year, these have been mostly in areas like small caps, public sector undertakings, industrials, defence, green energy, etc. Most investors think it means these fund managers believe that the theme will give superior returns.
Their enthusiasm shows up in data from the Securities and Exchange Board of India (Sebi): In 2024-25, 47.3% of net inflows into equity mutual funds have gone to sectoral/thematic funds. Small-cap funds have seen inflows of another 7.6%. All else, including large cap, multi cap, flexi cap, mid cap, etc, make up only 45%.
How skewed this is can be seen from the fact that thematic funds made up only 12.5% of the assets under management for equity mutual funds at the beginning of the year. The theme this year has clearly been thematic funds. In the past too, we have seen a clustering of schemes around a particular theme.
In 2021, for example, there were many Nasdaq or China/Greater China funds launched. All of them crashed the following year, with the Nasdaq being among the world’s worst performing indexes in 2022. This is a theme (pun intended) you would see play out every time NFOs cluster around a particular category, be it defined by geography, sector or size (small cap versus large cap).
Usually, investors lose money or underperform on such investments. The data is simple and clear. Most thematic schemes come around the end of the bull run for that theme.
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