Should you invest in thematic mutual fund NFOs? 6 factors to keep in mind

economictimes.indiatimes.com:

ABSL Mutual Fund launched a thematic fund, providing investors a way to play the emerging ‘manufacturing’ theme. Fast forward nine years and the investors who stayed the course find the thematic fund’s 12.5% return since inception lower than the broader market return for the respective period. Thematic new fund offers (NFOs) make a tantalising proposition—targeted exposure to specific themes. But do these funds truly perform? Statistically, funds like ABSL Manufacturing that didn’t do well form 36% of the thematic NFOs launched in the past 10 years. A higher 64% have done better than the overall market since launch, an ET Wealth study shows.

Game of themes
The reason for AMCs coming up with more thematic NFOs in recent years has been largely due to the regulatory cap of a single fund per category. However, funds can have any number of unique themes. Between 2014 and 2017, there were only six thematic equity NFOs (actively managed), but in the 2018-23 period, 55 new funds came into the market. Buoyant markets have helped. With equities giving double-digit returns in four of these six years, thematic funds have easily attracted eyeballs.

We compared ‘since inception returns’ of 61 thematic equity NFOs (growth-direct plans) with the respective return of BSE 500 Total Return Index (TRI). This universe manages investors’ assets worth over Rs.1.1 lakh crore today. Of the nearly five dozen funds, 39 have generated returns that were higher than the market, since launch. “The figure 64% seems like a decent hit rate in terms