The cost of chasing trends with sectoral and thematic funds
Subscribe to enjoy similar stories. The promise of big returns from thematic and sectoral funds comes with equally high risks. With nearly half of the 147 thematic and sectoral mutual funds trading below their issue price as of December, it is important to assess whether thematic funds belong in your portfolio or if they are better avoided.
In recent years, thematic and sectoral funds have captured investor interest by offering exposure to focused, high-growth market areas. Unlike traditional equity funds, they target companies in sectors with a common theme (e.g., environmental and social governance, or ESG, and defence) or companies in a specific sector (e.g., banking and infrastructure). On the one hand, investors are drawn to thematic and sectoral mutual funds for their ability to capitalise on big market trends such as electric vehicles (EVs) and artificial intelligence (AI), or policy-driven opportunities such as defence and solar energy.
On the other hand, as the Securities and Exchange Board of India (Sebi) allows only one scheme per category, asset management companies (AMCs) are pushed to focus on differentiated thematic products that will appeal to investors seeking unique opportunities. Also read | Asset quilt: How returns varied across assets classes in 2024 and last 10 years Past performance analysis is the most common mutual fund selection approach retail investors adopt. Many of them succumb to the appeal of sectoral funds after seeing their recent success but may have entered the market when a sector’s growth cycle is nearly complete.
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