Dealing with the deluge of thematic/sectoral funds

Mutual funds mobilised over ₹1 lakh crore through new offerings. 

Thematic and sectoral funds have recently gained popularity among both investors and fund houses. In FY25 alone, 52 such active schemes were launched — the highest number in any financial year so far. If one includes index and ETF funds based on sectoral themes like defence, banking, and energy, the total number of new schemes in FY25 rises to 101.

Pure thematic/sectoral funds accounted for nearly 25 per cent of all new fund offerings (NFOs) in FY25. This share increases to around 50 per cent when sector-based index funds and ETFs are included.

NFOs on the rise

The April edition of Market Pulse from the National Stock Exchange revealed that FY25 marked a significant rebound in new fund launches. Mutual funds mobilised over ₹1 lakh crore through these new offerings. This is the second-highest tally in the last decade, after FY19. The rise reflects growing investor interest in thematic and sectoral schemes, among others.

Thematic and sectoral mutual funds focus on specific industries, sectors, or broader investment themes. Unlike diversified equity funds that invest across sectors, these funds concentrate on companies within a chosen theme. They may invest in stocks across market capitalisations, which allows some level of internal diversification.

Sectoral funds typically invest in a single sector such as IT, defence, consumption, healthcare, banking, or energy. Thematic funds, in contrast, follow broader ideas like renewable energy, digital transformation, or urban development — and can invest across sectors that align with the theme.

By the end of FY25, there were 212 thematic/sectoral funds managing assets worth ₹4.44 lakh crore, a fourfold rise from ₹98,000 crore in FY21.

Regulatory boost

One reason for this explosion of thematic/sectoral funds is a gap in market regulator SEBI’s rules. It mandates that asset management companies (AMCs) can offer only one active fund per equity or debt category, for instance, one large-cap, one mid-cap, and one small-cap fund.

However, thematic/sectoral funds and passive index funds are exceptions to this rule. As long as the investment ideas are distinct, AMCs are allowed to offer multiple thematic/sectoral funds such as banking, IT, defence, or pharma funds.

Some of the thematic and sectoral funds launched in FY25 included: Active momentum fund, energy opportunities, Consumption, Financial Services, India Business Cycle, Innovation Opportunities, Railways PSU, Manufacturing, Nifty Bank, Nifty IT, Quant Fund, Conglomerate Fund, Healthcare Fund, Transportation & Logistics, Ethical fund, Nifty Capital Market, Digital India and defence funds, among others.

Major risks

Thematic and sectoral funds are inherently riskier because they are both volatile and cyclical in nature. With markets at elevated levels, the recent deluge of these NFOs raises concerns about sectoral concentration risk. While such funds may deliver strong returns in the short term, often driven by current market trends, they can also underperform sharply if the underlying sector turns unfavourable.

For instance, defence funds have seen a recent surge in performance amid heightened geopolitical tensions. However, predicting which sector will outperform in the short term remains a challenge.

Playing the complex thematic landscape requires a nuanced understanding of macroeconomic conditions and sector dynamics. Investors need to adopt a diversified approach and stay updated with industry trends.

These funds are best suited for investors who can interpret macro signals, read shifting sectoral trends, and stay invested for the long term. It will be interesting to observe how investors behave during a market downturn in such funds. There are already voices in the industry calling for tighter regulation of thematic NFOs

Published on June 6, 2025