MUMBAI: After years as one of the mutual fund industry’s most aggressively sold categories, thematic schemes dropped to the bottom of equity fund inflows in FY26, marking a sharp reversal in a segment that once led the market’s narrative-driven bets.
Investor appetite for thematic and sectoral funds weakened through FY26, with inflows plunging 79% year-on-year to ₹29,973 crore as volatile markets pushed money towards more diversified equity categories. The weakness has carried into FY27, with thematic funds recording the lowest inflows among equity categories at just ₹1,949 crore in April, according to data from the Association of Mutual Funds in India (Amfi).
The reversal marks a break from the past five years, when thematic funds consistently led equity inflows on narratives around defence, PSUs and railways. In FY26, almost every other equity category, except largecap funds, attracted more money.
Thematic and sectoral funds accounted for about 14% of equity mutual fund assets as of March, when total equity assets stood at roughly ₹33 trillion. At their peak in FY25, the category attracted inflows of ₹1.46 trillion.
The shift is also visible in where investors have moved. In FY26, flexicap schemes received the highest net inflows at ₹89,701 crore, followed by midcap and smallcap funds at ₹51,195 crore and ₹51,872 crore, respectively.
Behind the decline lies a sharp shift in how money entered the category. Nearly 80% of net inflows in FY26 came through new fund offers (NFOs), indicating that flows were driven more by fresh launches than sustained allocations to existing schemes. The skew towards NFO inflows also suggests the category remained heavily dependent on distributor-driven launches, without which inflows would likely have been far weaker.
Thematic funds invest in broad narratives such as automation or electrification, while sectoral funds focus on industries such as automobiles or railways. That concentration amplifies both gains and losses.
Volatility, fatigue and uneven returns
Volatile markets have reduced appetite for concentrated bets, while a flood of launches has also led to “theme fatigue”. With 148 thematic NFOs launched over the last five years, there are only so many “new” themes investors are willing to buy into, according to experts.
Thematic funds get inflows when the overall investor market sentiment is strong because investors are more willing to take targeted bets on sectors and themes that have recently performed well, said Srikanth Meenakshi, co-founder of PrimeInvestor, a mutual fund research platform.
But with markets turning volatile and investor confidence weakening, thematic funds sit at the top of the risk-and-sentiment pyramid, hence they are seeing a disproportionately sharper fall in flows, Meenakshi added.
Performance across thematic funds has remained uneven. Quantum Ethical Fund, with an AUM of ₹102 crore, declined 7.92% for the one year ended March 2026, against a 6.1% fall in the Nifty 500 Shariah TRI. ICICI Prudential India Opportunities, with assets of ₹36,083 crore, returned 0.23% versus a 2.86% decline in the Nifty 500 TRI, according to Amfi data.
One thematic fund comes after another, and eventually there is stock overlap across themes, said Manish Jain, deputy chief executive officer at Choice Mutual Fund. “The idea behind thematics is differentiation, but once that differentiation disappears, it becomes a challenge. It turns into an ‘old wine in a new bottle’ kind of story.”
Fund proliferation
Regulatory changes have also made thematic launches harder to sustain. A Securities and Exchange Board of India (Sebi) rule requiring NFO proceeds to be deployed within 30 days has created challenges for funds operating in narrow themes such as defence, manufacturing, electric vehicles and PSU stocks.
If asset management companies (AMCs) raise large sums in these categories, rapid deployment can force fund managers to buy stocks at elevated valuations or take concentrated positions in limited names, potentially hurting performance.
In FY26, the number of thematic NFOs fell to 38 from 52 a year earlier.
Thematic and sectoral funds have historically proliferated because there is no cap on the number of schemes AMCs can launch in these categories, unlike broader equity segments such as largecap or smallcap funds. Higher distributor commissions on such products have also supported sales and inflows.
However, Sebi tightened rules in February this year, stating that not more than 50% of a thematic or sectoral fund’s portfolio can overlap with existing schemes. The move is aimed at forcing greater differentiation and curbing duplication across launches.
This will create differentiation in terms of new funds and also reduce the number of thematic funds, leading to lower inflows in such funds, experts say.
The category remains concentrated, with a handful of large schemes dominating assets, including ICICI Prudential India Opportunities with ₹36,083 crore and HDFC Defence Fund with ₹9,124 crore, according to Value Research data.